Everyone wants to keep more of their hard-earned money. Luckily for older adults, many of whom are on a fixed income, there are several ways for them to save on taxes.
With 1 in 3 adults aged 70-79 having saved less than $100,000 for retirement, every deduction counts.
A good way to make sure you aren’t missing out on deductions is to get professional guidance. There are free tax-preparation services available to seniors through the IRS and AARP.
Also, those with income under $69,000 per year can file online for free using one of several tax-software providers. These online providers and IRS-certified volunteers can answer questions about senior tax perks like the ones below.
When You Turn 50
Larger IRA contributions – Those over the age of 50 can contribute $1,000 more to their IRA, making the maximum contribution for the year $7,000.
For a traditional IRA, these contributions act as a tax deduction. Also, once you reach 59 ½, you no longer have to pay an early-withdrawal penalty for these funds.
401(k) catchup contributions – Though not many take advantage of this perk, those over 50 can contribute an additional $6,500 to a 401(k) for 2020, bringing the total allowable contributions for the year to $26,000.
Contributions to traditional 401(k)s are pretax dollars, lowering your taxable income while helping save for retirement.
When You Turn 55
Higher HSA contribution – Those 55 and older can contribute $1,000 more to their HSA than younger people as a “catchup” opportunity. These contributions are tax exempt and can be used for most medical expenses.
There are no income qualifications for an HSA, though you must be enrolled in a high-deductible health insurance plan.
When You Turn 65
Higher standard deductions – Those over 65 get their taxable incomes lowered with a larger standard deduction. Married couples filing jointly can add $1,300 per person over 65 to their deduction.
Since over 90% of people take the standard deduction instead of itemizing, this is a deduction almost everyone can take advantage of.
Higher tax-filing threshold – The minimum income that triggers a need to file a tax return at all is higher for those 65 and older.
A single person over 65 would only need to file a return if his/her income was over $13,850. For a couple filing jointly, both over age 65, the threshold is $25,700.
Tax credit for the elderly or disabled – This tax credit directly lowers the tax bill by between $3,750 and $7,500 for those who qualify. People over 65 can qualify if they meet income restrictions.
For someone filing on their own, income must be less than $17,500 and total nontaxable Social Security benefits below $5,000, but there are different limits for different filing statuses.
People who have retired on permanent disability may also qualify for the tax credit. This tax credit is difficult to qualify for and can be confusing.
To see if you qualify, go to the IRS website and use their online tool.
Property tax exemptions – Typically applied to those over 65, many states and cities give seniors special exemptions on the value of their homes.
These exemptions vary depending on where you live, but the property needs to be your place of residence, and many places stipulate how long you need to have lived there. The exemption for those over 65 in New York, for example, is 50% of the home’s value provided your annual income is less than $29,000.
Credits and Deductions for Everyone
Medical expense deductions – Most medical and dental expenses, including long-term care insurance, qualify for a deduction only if the total amount of those expenses is more than 7.5% of your adjusted gross income.
You need to itemize your deductions rather than taking the standard deduction for this to apply.
Business deductions – Many older adults leave company roles to work full- or part-time for themselves. When running your own business, there are a lot of tax deductions to take advantage of, such as equipment, a home office, and travel.
If you spend more than you earn, which can happen when starting, you can deduct that loss from your other income sources.
Giving tax-free to charity – After 70 ½, annual withdrawals are required from traditional retirement accounts. If you do not need the money but want to avoid a penalty fee, you can donate money directly to a charity from your IRA, avoiding income tax on that withdrawal.
A single person can contribute up to $100,000 tax-free each year, and you can take advantage of this even if you are taking the standard deduction.
Article provided courtesy of SeniorLiving.org (seniorliving.org).