While many people have reduced income during their retirement years, that doesn’t mean that the IRS doesn’t want their share. Retirees must pay taxes on Social Security benefits, pension income, IRAs, 401(k)s and other sources of income. That tax bill can add up quickly if retirees don’t plan carefully and take advantage of all available deductions. Here are 11 tax deductions senior citizens should know about.
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1. Traditional IRA Contributions at Any Age
Before 2020, individuals who were 70.5 years of age or older were not eligible to make regular contributions to traditional IRAs. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed this when it was passed in 2019, removing the age restriction.
This means that senior citizens can still contribute past that age and enjoy the corresponding tax deduction. For individuals ages 50 or older, the annual contribution limit for the 2023 tax year was $7,500 or the total taxable compensation if less than $7,500.
2. Tax-Deductible HSA Contributions
Senior citizens can also benefit from a tax deduction for health savings account contributions. Deposits made directly to an HSA can be claimed, but keep in mind that any contributions through an employer have already been accounted for on the W-2.
Contributions to an HSA are exempt from federal income tax at the time of deposit and can generate interest. These funds are available to pay for a wide range of qualified medical expenses whenever they’re needed.
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3. Extra Standard Deduction
The standard deduction provides individuals with a certain threshold below which income is not taxed. However, some seniors may not be aware that this deduction is increased for those age 65 or older.
For tax year 2023, the addition to the standard deduction for individuals 65 and older is $1,850 for single filers and $1,500 each for married taxpayers. There is an additional increase to the standard deduction for individuals who are blind as well.
4. Lifetime Learning Credit
The lifetime learning credit is another tax deduction that some senior citizens could benefit from. This tax credit can help cover a variety of education and professional development programs provided by eligible institutions.
The credit provides for 20% of the first $10,000 in eligible expenses, accounting for a maximum of $2,000 per year. There are also maximum gross income thresholds for eligibility: $80,000 for single filers and $160,000 for joint filers.
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5. Spouse’s IRA Contributions
There still may be opportunities to continue contributing to an IRA and enjoying the tax benefits even during retirement. A spouse who is still working can contribute up to $7,500 to their spouse’s existing traditional or Roth IRA.
This could be the right move to make, depending on the exact tax situation. Keep in mind that combined contributions to both your and your spouse’s IRAs must stay within the limit.
6. Tax-Free Vacation Home Profit
Seniors who own a vacation home and generate income from rentals of that property may still be eligible for some amount of tax exemption. Income is tax-free if a property is only rented for 14 days or fewer throughout the year.
However, the situation can quickly become complicated in other scenarios. It’s best to speak with a tax professional to ensure proper handling of this complex tax situation.
7. Qualified Charitable Distributions
Senior citizens age 70.5 and over who own an IRA can take advantage of tax-free qualified charitable distributions. They can transfer up to $100,000 per year, counting toward the required minimum distribution for their IRA.
If both spouses qualify, a total of $200,000 can be transferred by a married couple. Setting up an official qualified charitable distribution to claim these benefits is important. Retirees can speak with their IRA trustee to complete such transactions.
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8. State Tax Exemptions for Seniors
Federal income tax isn’t the only area where senior citizens can save with the right tax deductions. States with personal income tax also offer a variety of tax subsidies.
There are 27 states that offer some form of private pension income exemption and 32 states that have Social Security benefits completely exempt from state tax. The specific benefits vary from state to state, so senior citizens should speak with a local tax professional to be sure.
9. Social Security Benefits Exemption
In many cases, Social Security earnings can be exempt from federal income tax. This is often tied to other earnings, meaning that seniors who rely solely on Social Security have greatly reduced tax bills.
There may be no federal income tax payable for senior citizens with total earnings less than $25,000 per year. Between $25,000 and $34,000, there are also significant reductions in federal income tax.
10. Credit for the Elderly or the Disabled
The Credit for the Elderly or the Disabled provides a tax credit ranging from $3,750 to $7,500 for individuals who are either elderly or disabled, or both. The age test requires the individual to be at least 65 by the end of the tax year.
To claim the credit based on disability, the individual must be retired on permanent and total disability and have received taxable disability income for the tax year.
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11. Medicare Premiums
Medicare premiums are another tax-deductible expense that many seniors overlook. Those who itemize their deductions for their federal tax return can include Medicare premiums in their medical expenses.
This includes a variety of different Medicare expenses, such as:
- Medicare Part A
- Medicare Part B
- Medicare Part D
- Medicare Advantage
- Medicare supplement insurance
Other out-of-pocket medical expenses related to Medicare may also be eligible.
Don’t Let Unclaimed Deductions Impact Your Finances
These 11 tax deductions are just a few examples that could help senior citizens put more of their income toward enjoying their retirement. Of course, everyone’s tax situation is unique. Working with trusted financial professionals can ensure effective retirement planning and tax strategy to make the most of retirement.
