14 Valuable Tax Breaks for Seniors
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. Here are some tax breaks to remember during the golden years.
People who take the standard deduction on their federal tax returns instead of itemizing enjoy a little bump in that line item when they turn 65. 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, 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 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.
Three states -- Illinois, Mississippi, and Pennsylvania -- exempt all pension income from taxes. In New Mexico, people over 100 don't have to pay taxes on any income.
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.
People 65 and older can deduct medical and dental expenses -- potentially huge for seniors -- that total more than 7.5 percent of adjusted gross income (the amount will increase to 10 percent for 2017 taxes next year). These expenses include devices like wheelchairs or hearing aids, in-home nursing or caregiving, and prescribed nutritional supplements.
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.
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.
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 the year the account holder turns 70.5.
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 are tax-free when withdrawn.
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.