5 Great Tax Deductions and Credits for Retirees
Via Tina Orem, Nerdwallet
They say that with age comes wisdom. But with age also come a few tax perks.
Once your birthday cake has 50 candles on it, the IRS starts to lighten up a bit. And when you hit 65, the IRS has a few more small presents for you — if you know where to look. Here are five tax deductions and credits you don’t want to miss after you’ve blown out all those candles.
1. A higher standard deduction
If you take the standard deduction instead of itemizing (learn how to decide here), you get a bonus of up to $1,500 if you or your spouse is 65 or older.
Filing statusRegular standard deductionStandard deduction, age 65+Single$6,300$7,850Married, filing jointly$12,600$13,850Married, filing separately$6,300$7,550Head of household$9,300$10,800
If you or your spouse is legally blind, your standard deduction can increase an additional $1,250.
2. More room to shelter income
Because contributions to a 401(k) are tax-advantaged, the IRS limits how much you can contribute each year. For folks under 50, that limit is $18,000. If you’re over 50, though, you can put in $24,000 per year.
But alas, that assumes that you’re still working and that your employer offers a 401(k) plan.
If you’ve already kissed your cubicle goodbye, you may still be able to contribute an extra $1,000 a year to a traditional IRA or a Roth IRA, if you qualify for a Roth. That’s thanks to the IRS’ catch-up provision for people 50 and older. And remember, you can put money into a traditional IRA until the year you reach age 70½; there’s no age limit on Roth IRA contributions.
» MORE: Traditional IRAs vs. Roth IRAs
3. A bigger deduction for medical expenses
If you itemize, you can deduct unreimbursed medical expenses — but only the amount that exceeds 10% of your adjusted gross income. For example, if your adjusted gross income is $40,000, the threshold is $4,000, meaning that if you rang up $10,000 in medical bills, you could deduct $6,000 of it.
If you or your spouse is 65 or older, however, that 10% threshold dips to 7.5% for the 2016 tax year — netting you a bigger deduction. So for that hypothetical $10,000 in medical bills, that means you could deduct $7,000 instead of $6,000. (Beware, though: the threshold is set to rise to 10% in 2017 unless Congress takes action.)
And if you’ve recently purchased long-term care insurance, you may be able to add in $380 to $4,750 of the premiums, depending on your age (the older you are, the more you can deduct).
One important note: Seniors only get this deal for the 2016 tax year. Starting with the 2017 tax year, the threshold is 10% for everyone.
4. A safety net for selling that empty nest
This tax deduction is available to everyone regardless of age, but it’s especially useful if you’re itching to sell your house and downsize in retirement. The IRS lets you exclude from your income up to $250,000 of capital gains on the sale of your house. That’s if you’re single; the exclusion rises to $500,000 if you’re married.
So, if you bought that four-bedroom ranch house back in 1974 for $100,000 and sold it for $350,000 today, you likely won’t have to share any of that gain with Uncle Sam. There are a few conditions, though:
The house has to have been your primary residence.
You must have owned it for at least two years.
You have to have lived in the house for two of the five years before the sale, although the period of occupancy doesn’t have to be consecutive.
You haven’t excluded a capital gain from a home sale in the past two years.
5. More help if you’re disabled
You may qualify for a $3,750 to $5,000 tax credit, depending on your filing status, if you or your spouse retired on permanent and total disability. The credit, called the Credit for the Elderly or the Disabled, goes up to $7,500 if you’re 65 or older.
But be prepared for this one to give you a few gray hairs. First, few people qualify for the credit; most of the time, your Social Security benefits will cause you to exceed the income limits. And if you lived with your spouse during the year, you have to file jointly. Plus, the tax credit is nonrefundable, which means that if you owe $250 in taxes but qualify for a $5,000 credit, you won’t get a check from the IRS for $4,750. But at least you’ll get to enjoy a $0 tax bill.
Tina Orem is a staff writer at NerdWallet, a personal finance website.