"I'm kind of comfortable with getting older because it's better than the other option, which is being dead. So I'll take getting older."-- George Clooney
Getting older isn't fun in many ways, such as when your vision starts to deteriorate or your hip starts giving you trouble. There's a silver lining, though, in the many senior discounts available to older Americans. There are even special tax breaks for retirees.
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Here are a big bunch of tax breaks that are directly for older taxpayers or that will simply benefit many retirees along with other taxpayers.
A bigger standard deduction
When preparing your tax return each year, you get to choose between taking the standard deduction or itemizing your deductions if they total more than the standard deduction. Those aged 65 or older can use a higher standard deduction than the rest of us. For the 2017 tax year, the standard deduction is$6,350 for a single filer, $12,700 for those married and filing jointly, and $9,350 for heads of households. If you're 65 or older by the end of 2017, though, you can add an extra$1,250 if you're married or $1,550 if you're unmarried.
Deductions for charitable contributions
Retirees are often more generous than the rest of us, having accumulated ample assets over their lives that they're willing to share with others. Uncle Sam rewards that by offering tax deductions for charitable contributions. There are rules, of course. For example, the donations must be made to qualifying organizations. You'll need to be able to support your claimed deductions with evidence such as receipts or cancelled checks. For donations valued at $250 or more, a timely receipt from the receiving organization is required. Donations don't have to be monetary, either. You can also donate goods such as clothing and household items to charities, as long as they're in good and usable condition. You'll need to have a receipt of your donation, and you'll need to estimate the fair market value of each item instead of, say, deducting how much it originally cost you.
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Deductions for medical expenses
Deductions are also allowed for qualifying medical expenses you incur, and while this is equally available to all taxpayers, retirees are generally going to face heftier medical bills, because of their age. (Indeed, Fidelity Investments has estimatedthat a 65-year-old couple retiring today will spend, on average, a total of $260,000 out of pocket on healthcare during their retirement.) Again, there are rules and restrictions. For example, you can only deduct the portion of your qualifying medical expenses that exceed 10% of your adjusted gross income (AGI). So if your AGI is $60,000 and you have $6,000 or less in qualifying medical expenses, you'll get no tax relief. If you have $7,500 in qualifying medical expenses, though, you can take a $1,500 deduction. That 10% threshold used to be 7.5%, but beginning with the 2017 tax year, it's 10% for everyone.
A low-income tax credit
If you're 65 or older by the end of the tax year, or you're retired on permanent and total disability with taxable disability income, you may be able to claima hefty tax credit of between $3,750 and $7,500 if your income is sufficiently low and you haven't received more than $5,000 in non-taxable Social Security or pension benefits if you're unmarried or more than $7,500 if you are married and filing jointly. What's sufficiently low? It's an adjusted gross income of less than $17,500 if you're single or $25,000 if you're married and filing jointly. Ideally, you'll enjoy an income too great to qualify you for this generous credit, but if your means are modest, these thousands of dollars can really help.
The home sale exclusion
There's a powerful tax break available for anyone selling a home if they lived in it for at least two out of the five years preceding the sale. Retirees will often sell their home in order to move closer to their children or to a retirement community or simply to a less expensive home or region. The break lets you exclude up to $250,000 of the gain on the sale of your home from your taxable income -- and up to $500,000 of the gain if you're married and filing jointly. If you realize a gain of $300,000 on your home when you sell it, you can avoid paying taxes on $250,000 of that gain and only count a gain of $50,000. If your tax rate is 15%, you're saving a whopping $37,500!
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Investing tax breaks
More retirees own stocks than do twenty-somethings, and with investing come some tax breaks. For example, qualifying dividends and long-term capital gains get taxed at the lower tax rate of 15% for most people instead of being taxed at your ordinary income tax rate, which can be 25% or 28% or higher. On top of that, if you pay financial professionals for investment advice or other services, those expenses(along with others, such as subscriptions to investment periodicals) may be deductible, to the extent that they exceed 2% of your adjusted gross income.
Retirement accounts such as IRAs and 401(k)s offer big tax breaks, too. For starters, once you're 50 or older, you can contribute an extra $1,000 to your IRA on top of the regular limit for 2017 of $5,500. And with 401(k)s, you can chip in an extra $6,000 on top of the regular 2017 limit of $18,000, giving you a total contribution limit of $24,000. Retirees with Roth IRAs can enjoy their tax benefit -- tax-free withdrawals -- when taking out funds in retirement.
One of the biggest tax-related benefits for retirees is receiving Social Security benefits -- if you've paid Social Security taxes into the system for many years during your working life. Accordingto the Social Security Administration, retirement benefits for those with average earnings will likely replace about 40% of your pre-retirement earnings. Those who had above-average earnings in their working years can expect a lower replacement rate, and vice versa. This makes it especially valuable to learn more about Social Security strategies such as when the best age would be for you to start collecting benefits.
So while getting older isn't always fun, it does offer some financial perks and benefits. And as George Clooney noted, it certainly beats the alternative.
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