Not only can you enjoy your golden years without the downsides of having to go to work but you can also enjoy some extra tax breaks!
So, instead of dreading the end of the tax year and your tax bill, take comfort in knowing you can reduce your tax liability and see that not only do you no longer pay income tax on your salary, but you may not even owe income tax at all! Here’s how!
The Standard Tax Deduction Boost
The standard deduction is as the name suggests a standard deduction open to nearly every taxpayer (unless you’re a major philanthropist or small business owner).
And that standard deduction works with adjusted gross income to reduce the amount of your income taxes by reducing the income on which you pay taxes.
If you’re over 65, and take the standard deduction, the current value is around $1,300 and if you have a partner (also over 65), your combined standard deduction is about $2,600! Learn more about the standard deduction at the IRS site.
Medical And Dental Expenses
You can also get a tax deduction for medical expenses. The threshold for this recently increased but you still get tax deductions if your medical expenses were in excess of 10 percent of your adjusted gross income.
You can also write off, on your tax return, the costs of prescription drugs, therapy and mental health treatment, glasses, dentures, health insurance premiums, senior care, and expenses related to medical needs!
If you have too much taxable income, why not reduce that income by giving things to charity?
A charitable deduction allows a tax credit equivalent to the current value of the gift. Now, if that’s money, that will be 100% of the value, but if it’s something like old clothes it might just be half of the value.
You should always consult a tax planner if you want a tax credit for charitable donations, as they can help you structure your giving so that you might even end up completely tax-free!
Income Tax Filing Threshold (Adjusted Gross Income)
In the tax year where you start drawing your retirement income because you have hit 65, your income tax filing threshold rises and that means you may not need to file a return or list any itemized deductions at all.
Talk to your accountant or financial planners about how to take advantage of this.
Social Security Tax Exemption
Social security benefits and earnings are usually exempt from federal income taxes. Even if you do have to pay taxes on social security benefits this tax year, you will likely get a reduction in the amount that you have to pay tax on.
Business And Hobby Deduction
Just because you’ve retired, you don’t have to stop having fun. In fact, many seniors take up a hobby when they stop working and then they start to make a little (or a lot) of money from that hobby.
This makes you “self-employed” and while you will have to pay tax on your income, you can get deductions for advertising and marketing, the supplies you use in your hobby, home office costs, any consultants, education expenses, etc. that you use to run your business and more.
If you’re wondering what hobbies you can make money at we’ve got a list of hobbies for seniors to make money, as well as a list of online courses for seniors to learn new skills and if you’d rather get a job, we have a list of the best low-stress jobs for seniors too.
Elderly/Disabled Tax Credits
You earn these tax credits by either a.) being over 65 or b.) being permanently disabled.
There is a limit to how much income you can earn to claim these credits and the amount of credit available varies from year to year.
In 2019, if you filed jointly with your spouse and were eligible for this credit it was worth $7,000!
It’s worth noting that these credits can also help you qualify for a tax refund, not just a discount in taxes!
Retirement Plan Contributions
If you’re one of the many seniors that want to stay busy after they “retire”, then you will find that you can keep working and you can keep paying into your retirement accounts.
These contributions tend to have a saver’s credit which means you can take some of the money you pay in and deduct it from the bill that the IRS sends you.
This is not a “deduction” per se as a deduction only applies to the income on which you are taxed.
It’s also worth noting that when you take your retirement benefits, you don’t need to pay any income tax on them, so keep an eye on your retirement account, and don’t be afraid to draw down on it if you need to.
Home Ownership Benefits
If you own your own home, then you can get a large number of tax benefits from doing so.
You can deduct the mortgage interest in its entirety (as long as you don’t have a mortgage over $750,000) and you get substantial protection against capital gains if you have lived in your home for at least two of the last five years.
And if you sell your home to pay for healthcare? You can usually deduct those costs as a medical expense too!
State Taxable Income Exemptions
We can’t tell you what kind of tax break you will get from your state but many states do offer discounts for seniors (and some offer more favorable taxes in general – Montana and South Dakota, in particular, offer no inheritance taxes).
It can really pay off to investigate the provisions made by your state and it might even pay to move across state lines if you could live somewhere that would make your pension income go a lot further.
Final Thoughts On Tax Breaks For Seniors
Before you file a tax return, you should think long and hard about how you can save money and ensure that you maximize your own income.
If you don’t know how to take advantage of the breaks listed above? You should talk to a financial advisor or an accountant about doing so.
You don’t need to pay more tax than you owe, you’ve paid enough already across the course of your working life, it’s time to let the younger ones take on their share of the burden.