Tips for Seniors in Preparing their Taxes
Current research indicates that individuals are likely to make errors when preparing their tax returns. The following tax tips were developed to help you avoid some of the common errors dealing with the standard deduction for seniors, the taxable amount of Social Security benefits, and the Credit for the Elderly and Disabled. In addition, you'll find links below to helpful publications as well as information on how to obtain free tax assistance.
Standard Deduction for Seniors - If you do not itemize your deductions, you can get a higher standard deduction amount if you and/or your spouse are 65 years old or older. You can get an even higher standard deduction amount if either you or your spouse is blind. (See Form 1040 and Form 1040A instructions.)
Taxable Amount of Social Security Benefits -When preparing your return, be especially careful when you calculate the taxable amount of your Social Security. Use the Social Security benefits worksheet found in the instructions for IRS Form 1040 and Form 1040A, and then double-check it before you fill out your tax return. See Publication 915 PDF, Social Security and Equivalent Railroad Retirement Benefits.
Credit for the Elderly or Disabled - You must file using Form 1040 or Form 1040A to receive the Credit for the Elderly or Disabled. You cannot get the Credit for the Elderly or Disabled if you file using Form 1040EZ. Be sure to apply for the Credit if you qualify; please read below for details.
Who Can Take the Credit: The Credit is based on your age, filing status and income. You may be able to take the Credit if:
Age: You and/or your spouse are either 65 years or older;or under age 65 years old and are permanently and totally disabled.
Filing Status: Your income on Form 1040 line 38 is less than $17,500, $20,000 (married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).
And, the non-taxable part of your Social Security or other nontaxable pensions, annuities or disability income is less than $5,000 (single, head of household, or qualifying widow/er with diependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).
Calculating the Credit: Use Schedule R PDF (Form 1040 or 1040A), Credit for the Elderly or Disabled, to figure the amount of the credit. See the instructions for Schedule R PDF (Forms 1040 or 1040A) if you want the IRS to figure this credit for you.
Also see Publications 524 PDF (Credit for the Elderly or Disabled); and 554 PDF (Tax Guide for Seniors).
Free IRS Tax Return Preparation - IRS-sponsored volunteer tax assistance programs offer free tax help to seniors and to low- to moderate-income people who cannot prepare their own tax returns.
Other Helpful Publications
The Most-Overlooked Tax Breaks for Retirees
For new retirees, it's more important than ever to take full advantage of every tax break available. That's especially true if you're on a fixed income. After all, you have to stretch out your retirement savings to cover the rest of your life. But holding on to your money during retirement is easier said than done. That's why retirees really need to pay close attention to their tax situation.
Unfortunately, though, seniors often miss valuable tax-saving opportunities. In many cases, it's simply because they just don't know about them. Don't let that happen to you — check out these often-overlooked tax breaks for retirees. You could save a bundle!
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Bigger Standard Deduction
When you turn 65, the IRS offers you a gift in the form of a larger standard deduction. For example, a single 64-year-old taxpayer can claim a standard deduction of $12,550 on his or her 2021 tax return (it was $12,400 for 2020 returns). But a single 65-year-old taxpayer will get a $14,250 standard deduction in 2021 ($14,050 in 2020).
The extra $1,700 will make it more likely that you'll take the standard deduction rather than itemize. And, if you do claim the standard deduction, the additional amount will save you over $400 if you're in the 24% income tax bracket.
Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. If only one spouse is 65 or older, the extra amount for 2021 is $1,350 – $2,700 if both spouses are 65 or older. Be sure to take advantage of your age!
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Spousal IRA Contribution
Retiring doesn't necessarily mean an end to the chance to shovel money into an IRA.
Generally, you must have earned income to contribute to an IRA. However, if you're married and your spouse is still working, he or she can generally contribute up to $7,000 a year to a traditional or Roth IRA that you own. (We're assuming that since you're reading about breaks for retirees, you're at least 50 years old.) As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter's doors remain open to you.
There's an important limitation to keep in mind, though. The total combined contributions allowed for the year to your IRA and your spouse's IRA can't exceed $13,000 if only one of you is age 50 or older, or $14,000 if both of you are at least 50 years old.
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Deduct Medicare Premiums
If you become self-employed — say, as a consultant — after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses. One caveat: You can't claim this deduction if you're eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse's employer (if he or she has a job that offers family medical coverage).
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Tax Credit for Low-Income Seniors
It's easy to miss the special tax credit for low-income elderly (or disabled) people. The credit isn't mentioned at all on the main tax form (Form 1040) or schedules, and the 1040 form instructions only briefly reference it once. It's almost as if the IRS is trying to hide it (naw…they wouldn't do that). But now that we've told you about it, there's no excuse for overlooking this tax break if you're eligible.
To be eligible for the credit, you must be a "qualified individual" and pass two income tests. Generally, you're a qualified individual if, at the end of the tax year:
- You were age 65 or older; or
- You were under age 65, you retired on permanent and total disability, and you received taxable disability income.
The first income test is based on your adjusted gross income (AGI). If you file your tax return using the single, head-of-household, or qualifying widow(er) filing status, your AGI must be less than $17,500. If you're married and file a joint return, but only one spouse qualifies for the credit, your AGI can't reach $20,000. Married couples filing jointly must have an AGI below $25,000 if both spouses qualify. Finally, your AGI must be lower than $12,500 if you're married, filing a separate return, and lived apart from your spouse for the entire year.
The second income test is based on the combined total of your non-taxable Social Security, pension, annuity, and disability income. For single, head-of-household, and qualifying widow(er) taxpayers, the combined income must be less than $5,000. The same income limit also applies to joint filers if only one spouse qualifies for the credit. If both spouses on a joint return qualify for the credit, the income limit is $7,500. For married people filing a separate return who didn't live with their spouse during the year, the limit is $3,750.
If, after all of that, you determine that you're eligible for the credit, then you may be able to shave up to $750 off your tax bill if you're single or up to $1,125 if you're married. However, calculating the credit can be complicated. That's why the IRS will calculate the credit amount for you. To take them up on the offer, follow the steps outlined in the instructions to Schedule R (you'll also have to attach Schedule R to your return).
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Timing Tax Payments
Although ours is widely hailed as a "voluntary" tax system, it works best when there is the least opportunity not to volunteer.
So, although we think of April 15 as "Tax Day," taxes are actually due as income is earned, and employers have become the country's primary tax collectors by withholding taxes from our paychecks. When you retire, you break out of that system: Now it's up to you to make sure the IRS gets its due when it's due. If you wait to send a check until the following year when your tax return is due, you're in for a nasty surprise in the form of penalties and interest.
You have two ways to get the job done:
Withholding. Withholding isn't only for paychecks. If you receive regular payments from a 401(k) plan or company pension, the payers will withhold tax — unless you tell them not to. The same goes for withdrawals from a traditional IRA. That's right: In retirement, it's generally up to you whether part of the money will be proactively skimmed off for the IRS.
With 401(k)s, pensions and traditional IRA withdrawals, taxes will be withheld unless you file a Form W-4P to put the kibosh on it. For periodic payments (i.e., payments made in installments at regular intervals over a period of more than one year), withholding is calculated the same way as withholding from wages. When it comes to traditional IRA distributions or other non-periodic payments, withholding will be at a flat 10% rate, unless you request a different rate or block withholding altogether. However, non-IRA distributions that can be rolled over tax-free to an IRA or other eligible retirement plan are generally subject to mandatory 20% withholding — but stay tuned for a way around the 20% withholding.
Things are a little different with Social Security benefits. There will be no withholding unless you specifically ask for it by filing a Form W-4V. You can opt for withholding on Social Security at a 7%, 10%, 12% or 22% rate.
Withholding isn't necessarily a bad thing, as it stretches your tax bill over the entire year. It might also make life easier if you would otherwise have to make quarterly estimated tax payments.
Quarterly estimated tax payments. The alternative to withholding is to make quarterly estimated tax payments. You need to make estimated payments if you'll owe more than $1,000 in tax for the year above and beyond what's covered by withholding. Otherwise, you could face a penalty for underpayment of taxes.
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Avoid the Pension Payout Trap
There's a menacing exception to the general rule that it's up to you whether taxes will be withheld from payments from pensions, annuities, IRAs and other retirement plans. If you get a lump-sum payment or other rollover distribution from a company plan, you could fall into a pension-payout trap.
As mentioned earlier, if you take such a distribution, the company is required by law to withhold a flat 20% for the IRS ... even if you simply plan to roll over the money into an IRA. Even if you complete the rollover within the 60 days required by law, the IRS will still hold onto the 20% until you file a tax return for the year and demand a refund. Worse yet, how can you roll over 100% of the lump sum if the IRS is holding onto 20% of it? Failure to come up with the extra money for the IRA would mean that amount would be considered a taxable distribution — triggering an immediate tax bill, maybe penalties and certainly forever reducing the amount in your IRA tax shelter.
Fortunately, there's an easy way around that miserable outcome. Simply ask your employer to send the money directly to a rollover IRA. As long as the check is made out to your IRA and not to you personally, there's no withholding.
Even if you intend to spend some of the money right away, your best bet is still to ask your employer to make the direct IRA transfer. Then, when you withdraw funds from the IRA, it's up to you whether there will be withholding.
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The RMD Workaround
Required minimum distributions (RMDs) weren't required in 2020 — but they're back again for 2021 and beyond. Fortunately, though, retirees taking RMDs from their traditional IRAs may have an extra option for meeting the pay-as-you-go demand.
If you don't need the required distribution to live on during the year, wait until December to take the money. And ask your IRA sponsor to hold back a big chunk of it for the IRS — enough to cover your estimated tax on both the RMD and your other taxable income as well.
Although estimated tax payments are considered made when you send the checks, amounts withheld from IRA distributions are considered paid throughout the year, even if they're made in a lump sum at year-end. So, if your RMD is more than large enough to cover your tax bill, you can keep your cash safely ensconced in its tax shelter most of the year ... and still avoid the underpayment penalty.
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Give Money to Charity
Once you reach age 70½, there's a tax-friendly way to make charitable donations even if you don't itemize. It's called a qualified charitable distribution (or QCD for short). With a QCD, you can transfer up to $100,000 each year from your traditional IRAs directly to charity. If you're married, your spouse can transfer an additional $100,000 to charity from his or her IRAs. The transfer is excluded from taxable income, and it counts toward your required minimum distribution. That's a win-win! But you can't also claim the tax-free transfer as a charitable deduction on Schedule A if you do itemize.
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Give Money to Your Family
Few Americans have to worry about the federal estate tax. After all, most of us have a credit large enough to permit us to pass up to $11.7 million to heirs in 2021 ($11.58 million in 2020). Married couples can pass on double that amount.
But, if the estate tax might be in your future, be sure to take advantage of the annual gift tax exclusion. This rule lets you give up to $15,000 annually to any number of people without worrying about the gift tax. Your spouse can also give $15,000 to the same person, making the tax-free gift $30,000. For example, if you are married and have three married children and six grandchildren, you and your spouse can give up to $30,000 this year to each of your kids, their spouses and all the grandchildren without even having to file a gift tax return. That's $360,000 in tax-free gifts. Money given under the protection of the exclusion can't be taxed as part of your estate after your death.
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Tax-Free Profit from a Vacation Home
The rules are clear: To qualify for tax-free profit from the sale of a home, the home must be your principal residence and you must have owned and lived in it for at least two of the five years leading up to the sale. But there is a way to capture tax-free profit from the sale of a former vacation home.
Let's say you sell the family homestead and cash in on the break that makes up to $250,000 in profit tax-free ($500,000 if you're married and file jointly). You then move into a vacation home you've owned for 25 years. As long as you make that house your principal residence for at least two years, part of the profit on the sale will be tax-free.
Basically, the $250,000/$500,00 exclusion doesn't apply to any profit that is allocable to the time after 2008 that a home is not used as your principal residence. For example, assume you bought a vacation home in 2001, convert it to your principal residence in 2015 and sell it in 2021. The post-2008 vacation-home use is seven of the 20 years you owned the property. So, 35% (7 ÷ 20) of the profit would be taxable at capital gains rates; the other 65% would qualify for the $250,000/$500,000 exclusion.
Form 1040-SR: U.S. Tax Return for Seniors
What Is Form 1040-SR: U.S. Tax Return for Seniors?
If you are 65 or older you have the option of using Form 1040-SR: U.S. Tax Return for Seniors rather than the standard Form 1040 when you file your taxes in April. It is virtually identical to Form 1040 except that it has larger type and gives greater prominence to the senior-specific tax benefits.
Form 1040 and Form 1040-SR are now the standard forms used by taxpayers, whether or not they itemize deductions. Form 1040 was revised and simplified and Form 1040-SR was introduced with the Bipartisan Budget Act of 2018.
That act also abolished Form 1040-EZ, which was designed for taxpayers with uncomplicated tax situations, and Form 1040A, which was confusingly similar to the old Form 1040.
- The new Form 1040-SR is a variation of the standard Form 1040 used by most taxpayers.
- If you were at least age 65 by the end of 2020, you can use either form.
- Form 1040-SR uses larger type and gives greater prominence to tax benefits for seniors, particularly the additional standard deduction.
Understanding Form 1040-SR
Form 1040-SR is designed to be easier on the eyes and to give greater prominence to tax benefits specific to seniors.
Most importantly, a higher standard deduction is available to seniors who do not itemize. Form 1040-SR incorporates a chart detailing the amount of this additional standard deduction for taxpayers age 65 or older.
Taxpayers who were at least age 65 by the end of 2020 can add at least $1,300 to the standard deduction. The chart included with Form 1040-SR lists only the combined deduction amounts depending on filing status and other eligibility factors.
While the old Form 1040-EZ only allowed the reporting of income from wages, salaries, and tips, Form 1040-SR allows income from certain other sources.
Who Can File Form 1040-SR?
There are differences between the old Form 1040-EZ and 1040-SR, which are described below, including age requirements and total income allowed.
Ages 65 and Older
One major difference between Forms 1040-EZ and 1040-SR has to do with age. Form 1040-EZ was available to any taxpayer under the age of 65 who otherwise met income and filing requirements. To use 1040-SR, you must have turned 65 or older by the end of the tax year for which you are filing. For example, if you turned 65 on Dec. 31, 2020, you can use Form 1040-SR when you file your 2020 taxes in 2021.
Important: You don't have to be retired. If you are still working at age 65 and otherwise qualify to file Form 1040-SR, you may do so. On the other hand, early retirees (younger than 65) cannot use Form 1040-SR.
No Income Limit
Unlike Form 1040-EZ, which limited interest income to $1,500 and total income to $100,000 or less, Form 1040-SR has no limit on the amount of your total income for a given taxable year.
Expanded Income Categories
Furthermore, IRS Form 1040-SR allows the reporting of several types of income in addition to those allowed by Form 1040-EZ (wages, salaries, tips, taxable scholarship or fellowship grants, and unemployment compensation or Alaska Permanent Fund dividends).
Specifically, Form 1040-SR allows you to report Social Security benefits as well as distributions from qualified retirement plans, annuities, or similar deferred-payment arrangements. You may also include unlimited interest and dividends and capital gains and losses.
What About Tax Deductions?
Form 1040-SR, like Form 1040, can be used whether you take the standard deduction or itemize deductions.
Nevertheless, the vast majority of Americans now take the standard deduction, since the amounts allowed were virtually doubled with the 2018 tax reform law. That additional standard deduction for seniors is just one more incentive to avoid itemizing.
All pages of Form 1040-SR are available on the IRS website.
Special Considerations When Filing Form 1040-SR
Form 1040-SR simplifies tax-filing requirements for seniors. However, if you are a retiree under the age of 65, even if your income sources include Social Security, pensions, and investment income, you cannot use Form 1040-SR and must use Form 1040.
Despite this drawback, the introduction of Form 1040-SR and the revised Form 1040 are steps in the right direction when it comes to the simplification of tax-filing requirements.
History of Form 1040-SR
The legislation that resulted in the creation of IRS Form 1040-SR began March 5, 2013, with the introduction of the Seniors Tax Simplification Act by Senators Marco Rubio (R-FL) and Bill Nelson (D-FL), joined by Senators Mike Lee (R-UT) and Tom Carper (D-DE).
Following several failed attempts to turn the act into law—and despite endorsements by the AARP, the Association of Mature American Citizens, and the National Taxpayers Union—the bill didn't pass until Form 1040-SR language was adopted as part of the emergency spending bill signed by former President Trump on Feb. 9, 2018.
It’s that time again. Tax preparation commercials promise massive tax refunds. At intersections across the country, dancing characters try to lure motorists into the neighborhood accounting shop. Meanwhile, millions of people across the country scramble to get all of their paperwork together in time. Tax season can be a time of excitement, as a person eagerly awaits the refund they hope will fund a big purchase. Or it can be immensely stressful, producing a large bill and potentially a pile of debt. No matter where you fall on this continuum, a little knowledge can help you keep as much of your own money as possible.
The IRS offers a number of senior tax benefits, including deductions and credits. At the state level, you or your loved one may be eligible for even more benefits. Here are the top 10 senior tax benefits, and how you can take advantage of them.
Increased Standard Deduction
If your taxes are relatively simple — you’re not a small business owner, don’t give large sums to charity, and don’t itemize complex business deductions — then you probably already take the standard deduction, a standardized tax deduction that lowers your taxable income.
When you’re over 65, the standard deduction increases. The specific amount depends on your filing status and changes each year. For the 2019 tax year, seniors over 65 may increase their standard deduction by $1,300. If both you and your spouse are over 65 and file jointly, you can increase the amount by $2,600.
Different Filing Threshold
The filing threshold is the amount of income you must earn before being required to file a tax return. Individual factors can affect your filing threshold. For example, if you are self-employed or a small business owner, you must file a tax return for any earnings in excess of $400.
For typical taxpayers who are either employees or retired and drawing a pension or Social Security income, the filing threshold is much higher after the age of 65. Single filers under 65 must file a return when their income exceeds $12,000. Seniors don’t have to file a return until their income exceeds $13,600. Married filers who are both over 65 do not need to file a joint return unless their income exceeds $26,600.
If your sole or primary income source is Social Security or a pension, this may mean you do not have to file a return at all.
Social Security Tax Exemption
Social Security earnings are often exempt from federal income taxes. If you file as an individual and your Social Security and other earnings total less than $25,000 per year, you may not have to pay federal income taxes. If your Social Security and other earnings are between $25,000 and $34,000, you only have to pay income tax on 50 percent of your benefits.
For married people filing jointly, the threshold for paying any taxes on Social Security benefits is $32,000. If you jointly earn between $32,000 and $44,000, you only have to pay taxes on 50 percent of your benefits. For individuals or couples who exceed the 50 percent earning threshold, 85 percent of benefits become taxable,
Business and Hobby Deduction
Many seniors start businesses as consultants when they retire. Others pick up a new hobby and eventually become successful enough to sell on Etsy, at craft shows, or even in local stores. You must pay income taxes on this self-employment income. However, when you run a business, you are eligible for a wide range of deductions. Those deductions include virtually all costs associated with running the business, including:
Advertising expenses, such as the costs of a website or business cards.
Supplies, such as craft-making tools or printing supplies.
Home office expenses.
Expenses paid to a consultant or employee to help you run your business.
Business education expenses, such as books about business ownership or the cost of attending a conference.
Medical Expense Deduction
Beginning in 2019, the threshold for deducting medical expenses increased. For seniors with significant healthcare expenses, however, this deduction can still offer tax savings. You are allowed to deduct any medical expenses that exceed 10 percent of your adjusted gross income.
Although you can’t deduct general health expenses, such as vitamins or health club dues, you can deduct most professional medical fees, such as fees paid to a doctor or dentist. You can also deduct:
Prescription drug costs
Mental health expenses, such as the cost of therapy
The costs of glasses, dentures, and orthodontic appliances
Expenses incurred because of medical need, such as parking fees paid at the doctor
Health insurance premiums
The costs of senior care, such as in-home help or daycare
Elderly/Disabled Tax Credit
The tax credit for the elderly and disabled allows you to deduct money from the total amount owed to the IRS. This is different from deductions, which allow you to deduct from your total taxable income. This credit can also get you a tax refund if the deducted amount exceeds the amount you owe the IRS.
To be eligible for this credit, you must either be over the age of 65 or permanently disabled. Your income must not exceed certain levels, and those levels change from year to year. For 2019, for example, spouses filing jointly must not have an adjusted gross income in excess of $25,000.
The amount of the credit also varies from year to year and changes with filing status. In 2019, spouses filing jointly are eligible for a $7,000 credit.
You can deduct most charitable donations, including both money and property donated to charity. For example, if you donate clothing to Goodwill, you can deduct the sale value of the clothing to the charity — not the original sale price. In general, you can only deduct up to 50 percent of your adjusted gross income. If you donate significant amounts to charity or set up a foundation, talk to a tax planner about how to maximize your tax benefits because how you structure your giving may change your tax liability.
Retirement Plan Contribution Benefits
Many seniors continue working past retirement age. Others keep contributing to their retirement accounts. Retirement plan contributions are often eligible for a saver’s credit that allows you to deduct a portion of the contribution from the amount owed to the IRS. This is distinct from a deduction, which only allows you to deduct from the amount of taxable income you claim.
When you withdraw retirement benefits, you do not have to pay income taxes on them. So maintain a diligent account of your retirement income.
Home Ownership Benefits
Home ownership confers a number of tax benefits. Seniors who still pay a mortgage can deduct all mortgage interest on mortgages that do not exceed $750,000.
Seniors who sell their homes may worry about capital gains and other taxes on home sale profits. If you lived in your home for at least two out of the previous five years, you do not have to pay any taxes on profits less than $250,000 — or $500,000 for married taxpayers filing jointly.
When you sell your home, you can then use the profits to pay for senior living. Senior living that offers healthcare, such as assisted living or memory care, may be deductible as a medical expense.
State Senior Tax Exemptions
Federal taxes aren’t the only tax burden seniors face. You may also have to file and pay state income taxes. State tax rules vary quite a bit, and the state in which you choose to live can significantly affect your tax liability.
A number of states offer specific tax benefits to seniors, and it is common for states not to tax Social Security earnings. Below are some examples of state tax benefits and exemptions:
The Kentucky state income tax is just 2 percent, and Social Security earnings are exempt.
Some states, such as New Hampshire, Nevada, and Florida, do not tax income at all.
Mississippi’s state income tax is just 3 percent, with exemptions for Social Security, pensions, and retirement plan withdrawals.
Several states, including South Dakota and Montana, have no inheritance tax.
If you’re helping a senior parent file their taxes, you’ll already be talking finances, long-term plans, and healthcare. So consider having a conversation about how your loved one wishes to spend their retirement. Re-evaluate this plan each year as your loved one’s needs change.
Many seniors can save lots of money by moving into a senior living community. These communities offer loads of activities, easy access to new friends, and a chance at a vibrant and meaningful retirement. For help talking to your loved one about the benefits of senior living, download our free guide, Talking to Your Senior Parent About Senior Care and Living.
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Tax Breaks for Older Adults and Retirees
Retirement has a lot to offer, which explains why so many taxpayers diligently save for it over the course of their lifetimes. There are those perks that money really can’t buy, like your grandchildren, and the things you’ve been saving for: travel, not going to work every day, or even just sleeping in late on a Monday morning.
The Internal Revenue Service (IRS) gets it. The U.S. tax code offers quite a few tax breaks exclusively to older adults, including a special tax credit just for seniors.
A Larger Standard Deduction
You won't have to pay taxes on as much of your income, because the IRS allows you to begin taking an additional standard deduction when you turn age 65.
For tax year 2020—the tax return filed in 2021—you can add an extra $1,650 to the standard deduction you’re otherwise eligible for if you’re single or you qualify as head of household. You can add $1,300 for each spouse who is age 65 or older if you’re married and file a joint return. Both of you need not have yet hit your 65th birthdays either. For tax year 2021 (which you file in 2022), these amounts increase to $1,700, and $1,350, respectively.
You must turn 65 by the last day of the tax year to qualify for this additional deduction, but the IRS says you actually turn 65 on the day before your birthday. That means you would qualify on December 31 if you were born on January 1—just in the nick of time to claim the extra deduction for that tax year.
Standard Deduction or Itemized Deductions—Which Is Better?
You have a choice between claiming the standard deduction instead of itemizing your deductions, but you can't do both. And the Tax Cuts and Jobs Act (TCJA) pretty much doubled the basic standard deductions for all filing statuses—the deduction you can claim before you claim the extra bonus deduction for being age 65 or older, making it a somewhat difficult decision.
As of tax year 2020, the tax return filed in 2021, the base standard deductions before the bonus add-on for seniors are:
- $24,800 for married taxpayers who file jointly, and qualifying widow(er)s
- $18,650 for heads of household
- $12,400 for single taxpayers and married taxpayers who file separately
For tax year 2021, which you'll file in 2022, the standard deductions are:
- $25,100 for married taxpayers who file jointly, and qualifying widow(er)s
- $18,800 for heads of household
- $12,550 for single taxpayers, and married taxpayers who file separately
Many older taxpayers may find that their standard deduction plus the extra standard deduction for age works out to be more than any itemized expenses they can claim, particularly if their mortgages have been paid off and they don't have that itemized interest deduction any longer. But you could gain a larger deduction for itemizing if you still have a mortgage and factor in things like property taxes, medical bills, charitable donations, and any other deductible expenses you might have.
A Higher Tax Filing Threshold
Your threshold for even having to file a tax return in the first place is also higher if you’re age 65 or older, because the filing threshold generally equals the standard deduction you’re entitled to claim.
Most single taxpayers must file tax returns when their earnings reach $12,400 in the 2020 tax year (the amount of the standard deduction), but you can earn up to $14,050 if you’re age 65 or older (the standard deduction plus the additional $1,650). You can jointly earn up to $26,100 if you or your spouse is or older, and you file a joint return. If you’re both 65 or older, you can earn up to $27,400.
Taxable Social Security Income
Your Social Security benefits might or might not be taxable income. It depends on your overall earnings.
Add up your income from all sources, including taxable retirement funds other than Social Security and what would normally be tax-exempt interest. Then add half of what you collected in Social Security benefits during the course of the tax year. The Social Security Administration (SSA) should send you Form SSA-1099 around the first day of the new year, showing you exactly how much you received.
You don’t have to include any of your Social Security as taxable income if the total of all your other income and half your Social Security is less than $25,000 and you’re single, a head of household, or a qualifying widow or widower. That increases to $32,000 if you’re married and filing a joint return, and it drops to $0 if you file a separate return after living with your spouse at any point during the tax year.
If you fall outside of these income levels, up to 85% of what you collect in Social Security might be taxable.
The IRS offers an interactive tool to help you determine whether any of your Social Security is taxable and, if so, how much.
Tax Credits for Older Adults
One of the most significant tax breaks available to older adults is the Tax Credit for the Elderly and Disabled. This tax credit can wipe out some, if not all, of your tax liability if you end up owing the IRS.
You must be age 65 or older as of the last day of the tax year to qualify. That January 1 rule applies here, too—you’re considered to be age 65 at the end of the tax year if you were born on the first day of the ensuing year. You must be a U.S. citizen or a resident alien, but if you’re a non-resident alien, you might qualify if you’re married to a U.S. citizen or a resident alien.
You must file a joint married return with your spouse to claim the credit if you’re married, unless you didn’t live with your spouse at all during the tax year. And you won’t be eligible for this credit if you earn more than the following:
- $17,500 or more and your filing status is single, head of household, or a qualifying widow or widower
- $20,000 or more and you’re married, but only one of you otherwise qualifies for the credit
- $25,000 or more, and you file a joint married return
- $12,500 or more, and you file a separate married return, but you lived apart from your spouse all year
These numbers are based on your adjusted gross income (AGI), not your total income. Your AGI is arrived at after taking certain deductions, also known as "adjustments to income," on Schedule 1.
Limits also apply to the nontaxable portions of your Social Security benefits, as well as to nontaxable portions of any pensions, annuities, or disability income you might have. Those limits are as follows:
- $5,000 or more, and your filing status is single, head of household, or qualifying widow or widower
- $5,000 or more, and you’re married, but only one of you otherwise qualifies for the credit
- $7,500 or more, and you file a joint married return
- $3,750 or more and you file a separate married return, but you lived apart from your spouse all year
Unfortunately, you won’t qualify for the credit unless your income meets both of these thresholds. If you do qualify, the amount of the credit ranges from $3,750 to $7,500 as of tax year 2020.
Frequently Asked Questions (FAQs)
Which states provide the best tax breaks for retirees?
Many states exempt Social Security income from taxation, and some states don't tax income at all. The best states to retire for tax reasons are currently Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania.
How do you earn tax breaks in your retirement years?
Once you turn 65, you automatically have a larger standard deduction available, so be sure you're taking advantage of that if you're not itemizing deductions. When you reach age 70 and a half, you can also reduce your tax liability by giving some of your IRA distributions directly to a charity. This counts toward your required minimum distributions. Talk to your financial advisor about other ways to lower your taxes in retirement.
Do you have to pay income tax after age 70?
A portion of your income from Social Security, pensions, disability, and annuities is nontaxable, but if you make more than the limits, you will still have to pay some taxes after age 70.
What's the Standard Deduction for 2021 vs. 2020?
Returns for the 2021 tax year will be due on April 18, 2022 (April 19 for residents of Maine and Massachusetts).
2020 Standard Deduction Amounts
If you requested a filing extension for your 2020 tax return, then you'll still need the standard deduction amounts for the 2020 tax year. Or, perhaps, you just want to compare the 2020 amount with the 2021 figures to see how much more you'll get to deduct on next year's tax return. Whatever you need them for, the 2020 standard deduction information is below.
2020 Standard Deduction
Single; Married Filing Separately
Married Filing Jointly
Head of Household
For 2020, taxpayers who were at least 65 years old or blind could claim an additional standard deduction of $1,300 ($1,650 if using the single or head of household filing status). Once again, the additional deduction amount is doubled for anyone who is both 65 and blind.
Just like for 2021, the standard deduction for 2020 is the greater of $1,100 or earned income plus $350 if you can be claimed as a dependent on someone else's tax return. But, again, the total can't exceed the basic standard deduction for your filing status.
If you had unreimbursed casualty losses from a 2020 federally declared disaster (not including major disasters declared only because of COVID-19) and you didn't itemize, you could claim an increased standard deduction on your 2020 tax return. Unfortunately, that tax break doesn't apply for the 2021 tax year.
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