Seniors citizens are at a disadvantage when it comes to earned income. For those who no longer work due to retirement, affording basic expenses can be difficult.
Federal and state governments have enacted laws to offer tax relief to those who fall under these two categories. Depending on the state in which you live, the exemptions can vary wildly.
Here are seven ways seniors can get a break come tax time.
1. Property tax exemptions
“Many states offer a rebate or discount based on age alone,” says Michael Dinich, a Pennsylvania-based financial advisor. For example, the state of Alabama exempts those who are over 65, permanently disabled, or blind from paying the state portion of property tax (county taxes may still apply).
Many states offer a rebate or discount based on age alone”
In Arizona, however, the government requires that seniors also have income below a minimum amount. And instead of exempting eligible seniors from property tax, the state freezes the property value for three years to prevent property tax increases during that time.
“Generally, this is applied for by either submitting some paperwork or checking boxes on the tax return,” says Dinich. “In the case of an income-based incentive, the homeowner needs to be proactive and consider tax planning options to potentially reduce income.”
2. Medical expenses
For seniors, the cost of healthcare is astronomical. According to a recent Fidelity study, retired couples are estimated to spend $275,000 throughout retirement on medical expenses — and that’s including Medicare coverage and excluding long-term care.
The good news is that the IRS allows taxpayers age 65 and older to deduct medical expenses above 7.5% of their adjusted gross income on their tax return.
3. Sale of a home
At some point, many seniors sell their home to move to a retirement community or long-term care facility. If you’ve lived in your home for decades, it’s possible that the sale price will be far more than what you bought it for.
Of course, there’s a tax break for that. As long as you’ve lived in the home for at least two out of the last five years, part or all of the profit you make on the sale is tax-free — that’s up to $250,000 if you’re single and up to $500,000 if you’re married filing jointly.
4. Larger standard deduction
If you don’t have enough deductible expenses to itemize them, you’re still getting a leg up. File as single or head of household and you can add an extra $1,550 to the regular standard deduction. If you’re married filing jointly, you can add $1,250 for each spouse who is 65 or older.
That might not seem like a lot, but it’s important to consider your tax rate. For example, if your effective tax rate is 25%, this benefit would save you $387.50 if you’re filing as single or head of household. If you’re married filing jointly, you will save $625 for you and your spouse.
5. You may not even have to file
If you’re filing single and under 65 years of age, you don’t need to file a tax return if your earnings for the year were below $10,350. If you’re 65 and older, however, that number jumps to $11,900.
Seniors who are over 65 who are filing jointly can earn up to $23,200 before you have to file — for people under 65, that number is $20,700.
6. Special tax credit
Once you reach age 65, you’re eligible for the Senior Tax Credit for the Elderly and Disabled. The amount of the credit ranges from $3,750 to $7,500, depending on your eligibility. Note, however, that there are income limits based on your tax filing status:
Since tax credits decrease your tax liability dollar-for-dollar, this is one tax break you won’t want to miss.
7. Capital gains tax
The best way to earn income as a retiree is through investments. That’s because of the long-term capital gains, which you earn on investments you’ve held longer than one year, are generally lower than what you’d have to pay on ordinary income from your retirement account distributions. What’s more, investments don’t trigger Social Security or Medicare tax.
Tax relief options for seniors: The bottom line
As a senior citizen, you have several options for minimizing your tax liability.
If you’re not already, consider working with a tax professional to see which of these tax breaks apply to your situation.
Alternatively, consider using an online tax preparation service, which can help walk you through each of your options.The more time you spend researching your options, the easier it will be to lower your tax bill.
*Keep in mind that tax laws change periodically, so it’s critical that you consult with a tax professional for the most up-to-date advice and information. The information in this article is not intended as tax advice and is not a substitute for tax advice.