Navigating the tax landscape can be challenging, especially for retirees who need to maximize their income while minimizing their tax burden. Understanding the various tax breaks and deductions available can help retirees keep more of their hard-earned money. Here are 11 important tax breaks and deductions every retiree should know about. Source: Internal Revenue Service (IRS). Featured Image Credit: AndreyPopov /Depositphotos.com.
#1. Standard Deduction for Seniors
Retirees aged 65 and older are eligible for a higher standard deduction. For the tax year 2024, if you are single and over 65, you can add an extra $1,950 to your standard deduction. For married couples, each spouse over 65 can add $1,550. This increased deduction can significantly reduce your taxable income.
Source: IRS Topic No. 551 – Standard Deduction
#2. Medical and Dental Expenses
If your medical and dental expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct the excess. This includes insurance premiums, long-term care insurance, prescription drugs, and out-of-pocket medical expenses. Keeping detailed records of these expenses may help you maximize this deduction.
Source: IRS Publication 502 – Medical and Dental Expenses
#3. Retirement Plan Contributions
Contributing to traditional IRAs or 401(k) plans can still provide tax benefits. For those who are still working or have earned income, contributions to these plans can reduce your taxable income. In addition to that, if you have a Roth IRA, qualified withdrawals are tax-free, which can be a strategic approach to manage your retirement income.
Sources: IRS Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs), IRS Publication 560 – Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
#4. Tax-Free Social Security Benefits
Based on your income level, up to 85% of your Social Security benefits could be subject to taxation. However, if your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) is below certain thresholds, a portion or all of your Social Security benefits may be tax-free. Understanding these thresholds can help you plan your income to minimize taxes on Social Security.
You can find the thresholds for the taxation of Social Security benefits on the Internal Revenue Service (IRS) website.
Source: IRS Publication 915 – Social Security and Equivalent Railroad Retirement Benefits
#5. Sale of Principal Residence
Retirees who sell their primary home can exclude up to $250,000 of capital gains ($500,000 for married couples) from their taxable income, provided they meet the ownership and use tests. This exclusion can be a substantial tax break if you decide to downsize or relocate during retirement.
Source: IRS Topic No. 701 – Sale of Your Home, IRS Publication 523 – Selling Your Home
#6. Charitable Contributions
Retirees can deduct charitable contributions if they itemize their deductions. Additionally, those taking required minimum distributions (RMDs) from their IRAs can make Qualified Charitable Distributions (QCDs) directly to a charity. QCDs can satisfy RMD requirements without increasing your taxable income, offering a dual benefit.
Sources: IRS Publication 526 – Charitable Contributions, IRS Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
#7. State and Local Taxes
You can either deduct state and local income taxes or opt to deduct state and local sales taxes if the latter amount is greater. This deduction is capped at $10,000 ($5,000 if married filing separately). This can be particularly beneficial for retirees living in states with high income or sales tax rates.
Source: IRS Topic No. 503 – Deductible Taxes
#8. Mortgage Interest Deduction
If you still have a mortgage on your home, you can deduct the interest you pay, up to certain limits. For mortgages taken out before December 15, 2017, you can deduct interest on up to $1 million of mortgage debt. For mortgages taken out after that date, the limit is $750,000. This deduction can provide significant savings for retirees with mortgage debt.
Source: IRS Topic No. 505 – Interest Expense ,IRS Publication 936 – Home Mortgage Interest Deduction
#9. Earned Income Tax Credit (EITC)
Retirees who are still working and have a low to moderate income might qualify for the Earned Income Tax Credit. The EITC can reduce the amount of tax you owe and may even result in a refund. Eligibility and the credit amount depend on your income and filing status, so it’s worth checking if you qualify.
Source: IRS Publication 596 – Earned Income Credit (EIC), IRS EITC Qualification
#10. Investment Interest Expense Deduction
If you’ve borrowed money to invest, you can deduct the interest on the loan, up to your net investment income for the year. This can include interest paid on loans used to purchase taxable investments like stocks or bonds. This deduction can help offset investment income and reduce your overall tax liability.
Source: IRS Topic No. 505 – Interest Expense, IRS Publication 550 – Investment Income and Expenses
#11. Elderly and Disabled Tax Credit
Retirees aged 65 or older, or those who are permanently disabled, may qualify for the Elderly and Disabled Tax Credit. The credit varies between $3,750 and $7,500, depending on your filing status, income, and the amount of nontaxable Social Security and other nontaxable pensions you receive. The credit can reduce your tax liability on a dollar-for-dollar basis, offering substantial savings.
Source: IRS Publication 524 – Credit for the Elderly or the Disabled
Understanding these tax breaks and deductions can significantly impact your financial well-being during retirement. By taking advantage of these opportunities, you can lower your tax burden and stretch your retirement savings further. Always consult with a tax professional to ensure you are maximizing your tax benefits and staying compliant with the latest tax laws.
Disclaimer – Million Dollar Sense does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by Million Dollar Sense of such content or services. Use your discretion.
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