Many retirees experience a drop in income when they stop working and start living off savings and Social Security. Thankfully, there are a number of special tax breaks available to seniors. Retiree taxes can be tricky to navigate, so it pays to explore the different tax deductions, exemptions, and tax credits that are unique to senior citizens.
IMAGE SOURCE: GETTY IMAGES.
A higher standard deduction
Though many older Americans wind up itemizing their tax returns, for many seniors, it pays to take the standard deduction. This especially holds true if you don't have much in the way of charitable contributions, mortgage interest, or business expenses to write off. Since many retirees see their income go down once they stop working, the IRS offers a bit of tax relief in the form of a higher standard deduction. You can take advantage of this higher deduction if you're 65 or older by Dec. 31 of the tax year in question. For 2016, a single tax filer under 65 gets a standard deduction of $6,300, while a single filer 65 and older gets $7,850 -- a $1,550 difference. And if you're married filing jointly, you'll get an extra $1,250 if one of you is 65 or older.
Higher medical tax deductions
Healthcare can be a major strain on the average retiree's limited financial resources. Thankfully, many of the medical expenses you incur as a retiree are tax-deductible as long as you itemize your tax return. These include co-payments for doctor visits, prescription drugs, and Medicare premiums. You can also deduct the cost of traveling to and from medical appointments, including cab fare and parking fees. To claim a tax deduction for medical expenses, filers under 65 must have expenses that exceed 10% of their adjusted gross income (AGI), and come 2017, those 65 and older will be subject to the same threshold. But if you're currently 65 or over, your total costs for the year need to reach only 7.5% of your AGI for you to claim a medical expense deduction on your 2016 taxes.
Credit for the elderly or disabled
The IRS offers a special credit for low-income taxpayers over 65, as well as those under 65 who are permanently disabled. To be eligible as a single filer, you'll need to have an AGI of $17,500 or lower, and you can't receive more than $5,000 in non-taxable Social Security or pension benefits. If you're married and filing jointly, you'll need an AGI of $25,000 or lower, and you can't receive more than $7,500 in non-taxable Social Security or pension benefits. Though most seniors don't qualify because of these limits, you may get some tax relief if your income falls below the threshold.
Tax-free retirement distributions
If you contributed to a Roth IRA when you were younger, you're in luck. Any withdrawals you make from that account in retirement are completely exempt from taxes. Of course, the reason for this is that Roth contributions are taxed up front, so to tax withdrawals in retirement would essentially be double taxing. Still, if you're on a fixed income and limited budget, not having to pay taxes on distributions can make for a far more financially comfortable retirement.
State tax exemptions on Social Security
Social Security is a major source of income for countless retirees, but unfortunately, that income is subject to taxes at the federal level. The good news, however, is that depending on where you live, your Social Security may be exempt from state taxes.
The following 13 states currently impose some of sort tax on Social Security benefits:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
That said, all but Minnesota, North Dakota, Vermont, and West Virginia offer some form of exemption depending on your income level. As long as you don't live in one of those four states, you may get to hang on to a little bit more of your money.
When you're retired, every last dollar counts. Knowing which tax breaks to look out for can save you a large chunk of money at a time in your life when you just might need it the most.
The $15,834 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.