Years of hard work will pay off in retirement, or at least that’s the goal. One thing that’s for sure is retirees are often entitled to special tax benefits. After age 50, the IRS loosens its grip on your money, allowing you a little bit of room to maneuver. The sweet spot is after age 65 hits, when you’re allotted a few more tax breaks. As a retiree at tax time, don’t forget about these big five deductions and credits that can save you more money for your golden years.
- Standard Deduction: The standard deduction is higher for retirees, as you get a bonus of $1,500 if either you or your spouse is 65 or older. The standard deduction varies depending on your filing status as follows:
Status Standard Deduction Standard Deduction, Age 65+
Single $6,300 $7,850
Married, joint $12,600 $13,850
Married, separate $6,300 $7,550
Head of Household $9,300 $10,800
The standard deduction is raised by $1,250 if you or your spouse are legally blind.
- Retirement Contributions: Contributions to a 401(k) are limited each year by the IRS, because they are tax-advantaged. Taxpayers under age 50 can contribute up to $18,000, and those over 50 get an increase of up to $24,000 annually. This applies to those who are still working and contributing to an employer sponsored 401(k) plan.
If you’ve already retired, you’re still able to contribute $1,000 each year to a traditional or Roth IRA, as part of the catch-up provision for taxpayers aged 50 and over. You’re able to contribute to a traditional IRA until you are 70 ½, while a Roth IRA doesn’t carry age restrictions.
- Medical Expenses: Generally, taxpayers who itemize are able to deduct unreimbursed medical expenses that exceed 10% of your adjusted gross income. For instance, a taxpayer with an AGI of $50,000 has a threshold of $5,000. So, that same taxpayer with $10,000 in medical bills can deduct $5,000.
However, taxpayers over 65 years old (or their spouse) are entitled to a threshold reduction from 10% to 7.5%. This means the overall deduction can be higher. So, the above taxpayer, if over 65 can deduct around $6,0000 instead. Be warned though, that in 2017 this provision will be eliminated unless Congress acts, and the threshold will stay at 10% for everyone.
Long-term care insurance premiums are also deductible, ranging between $380 to $4,750. Your age determines how much you are eligible to deduct, as the older you are the higher the deduction.
- Sale of Your Home: While this isn’t a retirement-specific tax break, it can be increasingly beneficial to those looking to downsize during retirement. You are able to exclude up to $250,000 in capital gains related to the sale of your home if your single. Married taxpayers have an exclusion of $500,000.
Back in 1970 you bought a house for $100,000 and decided to sell it in your retirement for $350,000, you won’t have to pay any of that gain to the government. However, there are a few requirements:
- The house is your primary residence
- You owned the house for two years
- You lived in the house for two of the last five years prior to the sale, though the occupancy period doesn’t have to be consecutive
- You haven’t had a home sale capital gain in the past two years
- Disability: If you (or your spouse) are retired and on permanent and total disability, you may be eligible for a credit between $3,750 and $5,000. Known as the Credit for the elderly and Disabled, the threshold is raised to $7,500 for those ages 65 and older.
This is a hard credit to claim however, as few people actually qualify. In most cases, Social Security Benefits cause you to exceed the income limits. You also need to file a joint return if you lived with your spouse during the year. The credit is non-refundable, too, so even if you qualify for $5,000 credit but owe $250 in taxes, you won’t get the remainder back. You will, though, reap the benefits of a $0 tax bill.
