The federal government offers some major tax breaks for older Americans. Some of these perks deserve more publicity than they receive.
At age 65, the Internal Revenue Service gives you a larger standard deduction. For 2020, standard deductions look like this for taxpayers 65 and older: single filer or married filing separately, $14,050; head of household, $20,300; married filing jointly or qualifying widow(er), $26,100 (when one spouse is 65 or older) or $27,400 (when both spouses are 65 or older).
There are two situations where your standard deduction may be limited at age 65 or older, or disappear entirely. One is when another taxpayer claims you as a dependent. The other is when you are married and filing separately, and your spouse itemizes deductions.
You may be able to write off some medical costs. The I.R.S. will let you deduct qualifying medical expenses once they exceed 7.5% of your adjusted gross income (AGI). The list of eligible expenses is long. Beyond out-of-pocket costs paid to doctors and other health care professionals, it also includes things like insurance premiums for extended care coverage, travel costs linked to medical appointments, and payments for durable medical equipment, such as dentures and hearing aids.
Are you thinking about selling your home? Many retirees consider downsizing or living in a new part of the country as part of their retirement plan. If you have lived in your current residence for at least two of the five years preceding a sale, you can exclude as much as $250,000 in gains from federal taxation (a married couple can shield up to $500,000). These limits, established in 1997, have never been indexed to inflation. This exclusion is only allowed once every two years.
Low-income seniors may qualify for the Credit for the Elderly or Disabled. This incentive, intended for people 65 and older, can be as large as $7,500 based on your filing status. You must have very low AGI and nontaxable income to claim it, though. It is basically designed for those living wholly or mostly on Social Security benefits.
Affluent IRA owners may want to make a charitable IRA gift. Generally, once you reach age 72, under the new Secure Act rules you must begin taking required minimum distributions (RMDs) from traditional IRAs. If you already have plenty of income and wish to avoid additional taxes, you may not be looking forward to these annual withdrawals.
You have another option: you can make a Qualified Charitable Distribution (QCD) using traditional IRA assets. The QCD allows taxpayers to donate up to $100,000 of traditional IRA assets to a qualified charity in a single year. The amount donated counts toward your required withdrawal and the amount of the QCD is excluded from your gross income for the year of the donation. Eligibility to make a QCD still begins at 70½, even though the Secure Act raised the starting age for annual traditional IRA distributions from 70½ to 72.
Of course, some states also give tax breaks to seniors. For example, the following 11 states do not tax federal, state, or local pension income: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania. Twenty-eight states (and the District of Columbia) refrain from taxing Social Security income.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.
"Wisdom Wealth Strategies, LLC is a registered investment advisor offering advisory services in the states of Colorado and California, and in other jurisdictions where exempted." This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates.