6 Tax Deductions for Seniors to Take Advantage of Today

February 8, 2023

As people age, their tax situation can change significantly.

There are certain deductions and credits that become available to them that may not have been before. In this blog post, we will discuss the top tax deductions for seniors, including when you are considered a senior and how it changes your taxes, as well as a breakdown of the updates for people at ages 50, 55, and 65.

When Are You Considered a Senior for Tax Purposes?

For tax purposes, an individual is considered a senior once they reach the age of 65. This age threshold is used for several deductions and credits, including the medical expense deduction and the retirement savings contributions credit.

How Does Being a Senior Change Your Taxes?

Once an individual reaches the age of 65, they are eligible for several deductions and credits that may not have been available to them before.

Here are some of the most common deductions available to seniors.

The Medical Expense Deduction: This deduction allows seniors to deduct medical expenses that exceed 7.5% of their adjusted gross income. This threshold increases to 10% for tax years beginning after December 31, 2016, for taxpayers under the age of 65.
The Retirement Savings Contributions Credit: This credit is available to seniors who make contributions to a retirement account (IRA or 401(k)). The credit is equal to 50% of the first $2,000 contributed to the account for a maximum credit of $1,000.
The Credit for the Elderly or the Disabled: This credit is available to seniors who have reached the age of 65 or are permanently and totally disabled. The credit is based on the individual’s income and can be as much as $7,500.

Is it Better to Choose Standard or Itemized Deductions?

Infographic of a person cutting money for tax deductions for seniors

It depends on an individual’s specific circumstances, but generally, it is better for seniors to make itemized deductions if their total is greater than the standard deduction for their filing status.

The standard deduction for the year 2021 for someone over the age of 65 is $13,800 for married couples filing jointly and $12,550 for single filers. For the 2022 tax year, the limit is $25,100 for married couples filing jointly and $12,550 for single filers.

Itemized deductions include things like state and local taxes, mortgage interest, charitable contributions, and medical expenses. If the total of these deductions is greater than the standard deduction, it may be more beneficial for a senior to itemize their deductions.

For seniors, the medical expenses deduction can be especially valuable. Medical expenses are only deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI) for the tax year 2021 and 10% for the tax year 2022. This means that if a senior has high medical expenses, they may be able to deduct a significant portion of those expenses if they itemize.

Additionally, state and local taxes (SALT) deduction is capped at $10,000 for the tax years 2021 and 2022. This can be a significant benefit for retirees living in states with high property and income taxes.

Breaking Down The Deductions by Age

There are key differences in turning 50, 55 and 60 when it comes to taxes. Here is a breakdown of the major differences so you can be prepared for filing your taxes and make sure to take advantage of all the benefits that come with getting older.

Turning 50

When an individual turns 50, they are eligible to make catch-up contributions to their retirement accounts. These catch-up contributions, which are in addition to the regular contribution limits, allow individuals to save more for retirement.

For traditional and Roth IRAs, the catch-up contribution limit is $1,000 for 2021. This means that if you are 50 or older, you can contribute up to $7,000 to your traditional or Roth IRA in 2021, as opposed to the regular contribution limit of $6,000. This is a great way for individuals who may not have been able to save as much for retirement earlier in life to catch up and save more for their golden years.

For 401(k) plans, the catch-up contribution limit is $6,500 for 2021. This means that if you are over 50, you can contribute up to $26,000 to your 401(k) plan in 2021, as opposed to the regular contribution limit of $19,500.

The catch-up contribution limit for SIMPLE IRA plans is $3,000 in 2021, which means that if you are 50 or older, you can contribute up to $14,500 to your SIMPLE IRA plan in 2021, as opposed to the regular contribution limit of $13,500.

The catch-up contribution limit for SIMPLE 401(k) plans is $3,000 in 2021, which means that if you are 50 or older, you can contribute up to $19,500 to your SIMPLE 401(k) plan in 2021, as opposed to the regular contribution limit of $16,500.

These catch-up contributions can be a valuable tool for individuals who want to save more for retirement and potentially lower their tax bill by making the most of their pre-tax contributions. They allow people nearing retirement age to save more and make up for any shortfall in their savings.

It’s important to note that these catch-up contribution limits are subject to change and may be different in future years. It’s always a good idea to check with the IRS or a tax professional to ensure you are aware of the current limits for catch-up contributions.

Turning 55

At age 55, individuals are allowed to withdraw money from their 401(k) plan without penalty if they have separated from service. This means that if an individual is 55 or older and leaves their job, they can withdraw money from their 401(k) plan without incurring the 10% early withdrawal penalty.

This rule is known as the “Rule of 55,” and it’s important to note that it only applies to 401(k) plans and not to other retirement account types, such as traditional IRAs or Roth IRAs. Additionally, it only applies if an individual has separated from service, which means that they are no longer working for the company that sponsors the 401(k) plan.

Another tax change at 55 is HSA contributions. Individuals who are 55 or older are eligible to make an additional catch-up contribution to their Health Savings Account (HSA) in addition to the regular contribution limits. The catch-up contribution limit for HSAs is $1,000 in 2021. This means that if you are 55 or older, you can contribute up to $4,700 to your HSA in 2021 (if you have a self-only HDHP coverage) or $7,700 (if you have a family HDHP coverage), as opposed to the regular contribution limit of $3,600 and $7,000 respectively.

Turning 65

At age 65, individuals may be eligible for a higher standard deduction when filing their taxes. The exact amount of the increase varies depending on the individual’s filing status, but it generally ranges from an additional $1,300 to $1,650.

Additionally, the tax filing threshold for individuals age 65 or older is typically higher than for younger individuals. This means that older individuals may be able to earn more income before they are required to file a tax return.

Older individuals may also be eligible for additional tax credits, such as the Credit for the Elderly or the Disabled. These credits can help reduce the amount of taxes owed.

Additional Tax Deductions for Seniors

There are several credits and deductions that seniors may be eligible for when it comes to medical expenses, business deductions, charitable distributions and contributions, mortgage interest, and home sales.

Medical Expenses

In order to claim a deduction for medical expenses, the expenses must exceed a certain percentage of the individual’s adjusted gross income (AGI). For tax years 2021 and 2022, the threshold is 7.5% of AGI. This means that if an individual’s AGI is $50,000 and they have $5,000 in medical expenses, they can claim a deduction for $2,500 (the amount by which the expenses exceed 7.5% of AGI). However, starting from tax year 2023, the threshold will be back to 10% of AGI.

Business Deductions

Self-employed individuals, including seniors, can claim specific deduction amounts for business expenses such as office expenses, supplies, and equipment. This can include things like a home office, computer, internet and phone expenses, and other supplies. These deductions can help lower a senior’s self-employment income and thus reduce the self-employment taxes they owe.

Charitable Distributions and Contributions

Charitable giving tax deductions do not change when you are a senior, but seniors may have different opportunities for charitable giving, depending on their individual circumstances.

If you choose to itemize your deductions, you can deduct charitable contributions on your tax return. The amount you can deduct and the rules for deducting contributions depend on the type of organization you give to and how you make your donation. The limit for charitable contributions is generally 60% of your adjusted gross income (AGI) for cash contributions and 30% of AGI for contributions of appreciated property like stocks.

Seniors who are charitably inclined may have more assets that are considered charitable donations, such as appreciated securities or real estate, and may also be in a position to make substantial charitable gifts through their estate plans.

Additionally, some seniors may qualify for special tax incentives such as Qualified Charitable Distributions (QCDs) from their IRA, which allows them to make tax-free distributions to qualified charities directly from their IRA if they are over 70 1/2 years old.

If you are curious about what is considered a qualified organization when it comes to a charitable deduction, just give the organization a call. Just because your favorite charity is a registered nonprofit doesn’t necessarily mean your donation is deductible. It is always best to double-check if you plan to write off the fair market value on your taxes.

Mortgage Interest

Seniors who own a home may be able to claim a mortgage interest deduction paid on their primary residence. This can include interest on mortgages for a first or second home and can provide significant tax savings for homeowners. However, starting in 2018, the mortgage interest deduction is limited to $750,000 for new mortgages.

Home Sales

Seniors who sell their primary residence may be able to exclude a portion of the gain from the sale of the home from their income if they meet certain conditions, such as having lived in the home for at least two of the five years prior to the sale. For the tax year 2021, an individual can exclude up to $250,000 of gain from the sale of a primary residence if they are single and up to $500,000 if they are married and file a joint return.

State-specific

The states that provide the best tax breaks for retirees can vary depending on the individual’s circumstances and priorities, but generally, states with no or low income tax, sales tax, and property tax are considered to be the most tax-friendly for retirees.

Here are a few states that are often considered to be tax-friendly for retirees:

Florida: Florida has no state income tax and a relatively low sales tax rate. Additionally, Florida has a homestead exemption that can provide significant property tax savings for retirees.
Texas: Texas also has no state income tax and a relatively low sales tax rate. Additionally, Texas has a homestead exemption that can provide significant property tax savings for retirees.
Nevada: Nevada has no state income tax and a relatively low sales tax rate. Nevada also has a homestead exemption that can provide significant property tax savings for retirees.
Alaska: Alaska has no state income tax and a relatively low sales tax rate. Additionally, Alaska has a Permanent Fund Dividend program that provides a yearly payout to eligible residents from the state’s oil revenues.
Wyoming: Wyoming also has no state income tax and a relatively low sales tax rate. Additionally, Wyoming has a homestead exemption that can provide significant property tax savings for retirees.
South Dakota: South Dakota has no state income tax and a relatively low sales tax rate. South Dakota also has a homestead exemption that can provide significant property tax savings for retirees.

It’s important to note that these laws apply only to certain employers and employees, and there may be specific rules and exemptions that apply. Therefore, it’s always best to check with your state labor department for the most accurate and up-to-date information.

It’s also worth noting that the Federal Law, The Fair Labor Standards Act (FLSA), does not require employers to provide breaks for any length of time and does not distinguish between different age groups. However, many employers choose to provide breaks as a matter of company policy or to stay competitive in the job market.

Senior Tax Deductions FAQs

Here are a few frequently asked questions about seniors and filing taxes:

Do seniors have to file taxes?

If you are a senior citizen (65 years or older) and your income is below a certain threshold, you may not need to file taxes. However, it’s important to check with the IRS to see if you meet the income requirements for your filing status.

What are the tax deductions for seniors?

Seniors may be eligible for certain tax deductions, such as the additional standard deduction, medical expenses, and property taxes. There are also deductions available for investment income and charitable contributions.

Can a senior claim a dependent?

A senior can claim a dependent on their taxes if they provide more than half of the dependent’s support during the tax year. This can include a child, grandchild, or a parent.

Are social security benefits taxable?

Social security benefits could be subject to income tax, depending on the individual’s income level. Generally, if your income is below a certain threshold, your benefits will not be taxed. If your income is above the threshold, a portion of your benefits may be subject to tax.

How can a senior get help with their taxes?

Seniors can get help with their taxes by visiting an AARP Tax-Aide site, where trained volunteers provide free tax preparation assistance. They can also get help from a tax professional or use tax preparation software.

Do seniors have to pay capital gains tax?

Seniors, like all taxpayers, are subject to capital gains tax on the sale of specific assets, such as stocks, bonds, real estate, and other investments. The capital gains tax rate is determined by an individual’s income level and the length of time the asset was held.

For tax years 2021 and 2022, the capital gains tax rate for individuals in the highest income bracket (over $441,450 for single filers and $496,600 for married couples filing jointly) is 20%. For individuals in lower income brackets, the capital gains tax rate is 15%. For assets held for less than a year, the tax rate is the same as the individual’s income tax rate.

If an asset is held for more than a year, it is considered a long-term capital gain and is taxed at a lower rate than short-term gains.

It’s also worth noting that there is an exclusion on the sale of a primary residence, known as the home sale exclusion. If you meet certain requirements, you can exclude up to $250,000 of the gain from the sale of your main home if you are single and $500,000 if you are married and file jointly.

Are there additional tax benefits for veteran seniors?

Yes, there are additional tax benefits for veterans who are seniors. Some of the benefits available to veterans include:

Disability compensation and pension payments: These payments are not considered taxable income by the IRS and do not need to be reported on your tax return.
Military retirement pay: Retirement pay received by veterans as a result of service in the Armed Forces is generally taxable but may be partly excluded from income if it is based on years of service.
Home loan benefits: Veterans may be eligible for a VA-backed home loan, which allows them to purchase a house without making a down payment or paying private mortgage insurance.
Property tax exemptions: Some states offer property tax exemptions for veterans with a service-connected disability.
Income tax credit: Some states offer an income tax credit for veterans who are disabled or elderly.
Special tax credit for veterans: Some states offer a special tax credit for veterans.

It’s worth noting that the specific tax benefits available to veterans may vary depending on the state and the veteran’s individual circumstances. It’s best to consult with a tax professional or the Department of Veterans Affairs (VA) for more information on the benefits available to you.

Tax Breaks For Seniors

As people age, their tax situation can change significantly. Once an individual reaches the age of 65, they are considered a senior for tax purposes and are eligible for several deductions and credits that may not have been available to them before.

It’s important for seniors to understand these deductions and credits so that they can take advantage of them and potentially lower their tax bill.

Tax laws are constantly changing, so it’s always a good idea to schedule a meeting with a tax professional, like a CPA or check with the IRS for the most up-to-date information on deductions and credits for seniors.