20 Valuable Tax Tips for Seniors


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With age comes wisdom, as well as certain tax breaks. While seniors often face lower income and higher expenses (think health care and assisted living), there are also numerous federal and state rules aimed at easing their tax burden. Many seniors have questions about the new Tax Cuts and Jobs Act and how it will affect them. While there are some changes, for the most part, low- to middle-income seniors will not be affected; the cuts will mostly go to upper income retirees. Here are some tax breaks to remember during the golden years.

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The standard deduction will nearly double in 2018. This means that for about 94 percent of Americans, the standard deduction will make it no longer beneficial to itemize. For the 2017 tax year, however, the standard deduction will remain at $6,350 for singles, and $12,700 for couples. Seniors still get a bit of a bump. Single taxpayers 65 and older can deduct an additional $1,550; for couples, the increase is $1,250 if one spouse is 65 or older and $2,500 if both spouses are at least 65.
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Every state has some sort of property-tax benefit for seniors (often referred to as a homestead exemption), although the eligibility age varies. Six states have programs that freeze property taxes completely for seniors, and 10 limit how much a property's tax value can increase. Also, the homestead exemption can be larger when a homeowner reaches a certain age. (The larger the exemption, the lower the tax.) In Colorado, seniors 65 and older can exempt up to 50 percent of their residence's first $200,000 in value. In Alabama, taxpayers 65 and older are exempt from property tax. In several states -- Connecticut, Pennsylvania, and Rhode Island, for example -- property taxes and freezes are determined by local governments, not the state.
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It used to be that home equity debt of up to $100,000 was deductible. Many seniors whose mortgages had been paid off took advantage of that deduction to take out low-interest loans. While debt paid in 2017 is still eligible for the deduction, it has now disappeared, and will no longer be allowed as of 2018.
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Some states let senior taxpayers exclude quite a bit of income before taxes kick in: up to $65,000 in Georgia, $41,110 in Kentucky, and $68,000 in Tennessee. New Jersey is phasing in a deduction that is will allow married residents to exclude up to $100,000 of retirement income by 2020. In Rhode Island, there is a $15,000 exemption on all retirement income up to $80,000 for singles and $100,000 for married couples.
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In 37 states, Social Security benefits are not taxed, either because there is no state income tax or because Social Security is subtracted from federal adjusted gross income. At the federal level, if income is under $25,000 for a single person or $35,000 for a couple, Social Security benefits are not taxed. Above that, between 50 percent and 85 percent of those benefits are taxed, depending on income.
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Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming -- exempt all individual income from taxes. In New Mexico, people over 100 don't have to pay taxes on any income. Two states, Tennessee and New Hampshire, tax only dividend and interest income. However, Tennessee is phasing this out, so that it will be eliminated by 2022.
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In 14 of the 41 states that have an income tax, military and usually government and civil service pensions are exempt. In addition, 21 states offer at least a partial exemption of pension income.
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Married couples 65 and older with income (not including Social Security) under $23,300 do not have to file a federal return at all. The limit is $22,050 if one spouse is under 65, and $11,850 for individuals.
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People looking toward the future can take advantage of this tax break before they retire. It's a tax credit toward the first 50 percent, 20 percent, or 10 percent of $2,000 that's put into a retirement account, such as an IRA or an employer's retirement plan. Eligibility depends on income level, with the credit aimed at low- to moderate-income taxpayers. Those with the lowest income receive the biggest credit.
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Most people are not too worried about the new, higher ceiling of the estate tax. However, there are plenty of good reasons to give away assets before death, even for people of more modest means. Federal law allows people to give away $14,000 to an individual each year. So, people with five grandchildren can give away up to $70,000, $14,000 to each of them each year. In 2018, the limit will be $15,000.
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People 65 and older can deduct medical and dental expenses -- potentially huge for seniors -- that total more than 7.5 percent of their adjusted gross income in 2017 and 2018. The threshold, however, will climb to 10 percent in 2019. The 10 percent threshold had been set to take effect in 2017 but has been delayed until 2019 under the new tax law. These expenses include devices like wheelchairs or hearing aids, in-home nursing or caregiving, and prescribed nutritional supplements.
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Medicare Part B premium payments are considered a medical expense. The same goes for prescription plan premiums under Medicare Part D. Since this money comes out of pocket, it's also deductible.
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Selling a principal residence for a profit in order to move someplace smaller, or warmer, does not have to incur capital gains taxes. The Internal Revenue Service allows a profit of up to $500,000 for a married couple.
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Seniors 65 and older with income less than $25,000 if married filing jointly or $17,500 if filing individually can get a tax credit of $3,750 to $7,500. This credit also applies to people who had to retire before age 65 because of a disability.
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Seniors can continue to contribute up to $6,500 (rather than $5,500 for those under 50) to a traditional IRA, as long as they are not withdrawing funds. They might (depending on income) get a tax deduction for that contribution. But contributions are no longer allowed by the IRS the year the account holder turns 70.5. Contributions to a Roth IRA will be taxed, but when that money is withdrawn, it will be tax free.
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Tax- and penalty-free withdrawals from a Roth IRA can begin at age 59.5 as long as the account is at least 5 years old. The money wasn't tax-deferred when it was contributed, but the interest or other income from the account is tax-free when withdrawn.
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Money invested in a 401(k) with a former employer can be rolled over to an IRA, which has several benefits, such as increasing your investment options. However, if the employer cuts a check to you, rather than to the IRA, that counts as income and will be taxed, and the employer will be required to withhold 20 percent for taxes.
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Retirees living off their investments get some breaks. Interest income, dividends and capital gains on investments are taxed at a lower rate than regular income, generally 15 percent or not at all. And expenses relating to investing, like accounting fees, online brokerage fees, and fees to financial planners can be deductible.
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Giving back can pay. People who itemize deductions can deduct cash contributions to qualified charitable organizations that equal up to 60 percent of adjusted gross income. A senior who is clearing out their house can also deduct the fair-market value of any goods they donate to charity.
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The AARP Foundation is offering free tax prep to low- and moderate-income seniors (age 50 and up). This help is available at over 5,000 locations nationwide, and AARP lists the documents you will need to bring with you.

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