Social Security is a critical lifeline for millions of U.S. retirees, and thus, it is important that they take advantage of every tax benefit available to them. In fact, the Internal Revenue Service (IRS) offers several tax deductions for seniors, but not everyone knows about them.
Knowing about these deductions could help seniors maximize their income and make efficient financial decisions. It may also help them pocket some extra money. In this article, we will discuss 10 tax breaks for retirees that they may not know about.
Ten Tax Breaks For Retirees
1. Larger Standard Deduction
Seniors who are age 65 or older or whose spouse is at least 65 can claim a larger standard deduction. The standard deduction for those over age 65 is $1,750 more than the deduction available to those age 64 and younger. Married couples can boost their standard deduction by $1,400 if one of them is over 65 and by $2,800 if both are 65 or older. Moreover, a blind taxpayer or spouse can receive an even higher standard deduction.
2. Spousal IRA Contribution
If you are retired, it doesn’t mean you can’t contribute to an individual retirement account, or IRA. Generally, you need to have earned income to contribute to an IRA, but if your spouse is still working, they can contribute up to $6,000 to your traditional or Roth IRA.
You are eligible for this benefit if your spouse’s earned income is enough to contribute to your account. However, the total combined contributions to your IRA and your spouse’s IRA can’t be more than $13,000 annually if one of you is age 50 or over. If both of you are age 50 or over, the maximum total contribution is $14,000.
3. Different Filing Threshold
The filing threshold means the income you need to earn to be required to file a tax return. Different filing thresholds apply for different filers. Self-employed workers or small business owners need to file a return if their earnings surpass $400.
For employees or those who are retired and receive a pension or Social Security income, the threshold is much higher after age 65. Seniors don’t need to file a return unless their income is more than $14,050, while married filers over 65 don’t need to file a return until their income exceeds $27,400.
Finally, those who only receive Social Security as their primary income source may not need to file a return at all.
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4. Property Tax Breaks
Although property tax rules vary widely by state, people in some places qualify for property or school tax deferrals or exemptions if they meet certain requirements. For instance, Texas homeowners who are 65 years or older qualify for an extra $10,000 homestead exemption for school district taxes.
Thus, it is important for retirees to know and understand the property tax break rules in their region. Retirees may need to fill out a separate tax form or apply separately to claim a property tax exemption.
If you are an individual and your Social Security and other earnings total less than $25,000 annually, then you don’t have to pay any federal income taxes. Additionally, if your income is between $25,000 and $34,000, then you pay tax on only half of your benefits.
For married people filing jointly, there is no tax on Social Security if their income is below $32,000. They pay taxes on 50% of their benefits if their annual income is between $32,000 and $44,000.
6. Medicare Premiums Tax Deduction
If you become self-employed after retiring, then you can deduct the premiums paid for Medicare Part B and Part D. You can also deduct the cost of supplemental Medicare policies or the cost of a Medicare Advantage plan.
This deduction is available to retirees whether or not they itemize. Additionally, this deduction isn’t subject to the 7.5% adjusted gross income test, which is applicable to itemized medical expenses.
However, retirees can’t claim this deduction if they are covered by an employer-subsidized health plan offered either by their or their spouse’s employer.
7. Credit for Seniors and Disabled
You may be allowed to claim a tax credit for seniors if you or your spouse is 65 or older and have low income. Your adjusted gross income must be below $17,500 ($25,000 if you and your spouse are 65 or older), while your nontaxable Social Security and pension income must be below $5,000 ($7,500 for couples) to claim the credit.
The threshold income level is $20,000 if only one spouse is eligible for the credit. Those who are permanently disabled may also qualify for the rebate, irrespective of age.
8. Business and Hobby Deduction
If you are over age 65 and start a business, such as becoming a consultant or selling at online platforms, craft shows, or in local stores, then you might be eligible for additional deductions. Such deductions depend on the costs associated with running the business, such as advertising, home office expenses, supplies and more.
9. Give Money to Charity
Once you are 70½ years old, you can make charitable donations without paying taxes on the income using qualified charitable distributions (QCDs). Under QCDs, retirees who meet the age criteria can donate up to $100,000 annually from their traditional IRAs. Your spouse can also do the same from his or her IRA.
Such a transfer is excluded from taxable income, and it counts towards your required minimum distribution (RMD) as well.
10. Additional IRA Deduction
This tax break isn’t just for retirees, but it is still worth mentioning. Workers age 50 and older can save more money than younger people by contributing to an IRA. For example, a 50-year-old in the 24% tax bracket can save $1,800 in tax, compared to $1,560 in savings for a young person in the same tax bracket.