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. Retirees are often limited in their income sources.
Federal and state governments have enacted laws to offer tax relief to seniors and retirees. The exemptions can vary wildly depending on the state in which you live or file taxes.
Seniors stand to benefit greatly from identifying ways to maximize their tax relief. Here are seven ways retirees and seniors can get a break come tax time.
However, if you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief options have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates. Check out which tax relief company is the best fit for you, such as Optima Tax Relief.
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 years of age, permanently disabled, or blind from paying the state portion of property tax (county taxes may still apply).
In Arizona, however, the state requires that a senior citizen also have income below a minimum amount to qualify for an exemption. 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.”
Property tax relief
Property tax relief is often available to senior citizens age 65 and older but varies from one state to the next. Check with your state and local tax offices to see if you are eligible. In addition to state exemptions, some localities offer homestead tax exemptions. To qualify for this built-in property tax relief, you may be required to provide standard information to verify your disability or senior status.
2. Medical expenses
For seniors, the cost of healthcare can be 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 65 and older to deduct medical expenses above 7.5% of their adjusted gross income on their tax returns.
3. Sale of a home
Many seniors eventually opt to sell their homes to move to a retirement community or long-term care facility. If you’ve lived in your home for decades, the sale price today may be far more than what you bought it for years ago.
Fortunately, there’s a tax break for this situation. 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 of the home is tax-free. The limits for this extend 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 still qualify for a larger standard deduction. 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 a single person 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 and file jointly can earn up to $23,200 before they 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 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. Senior taxpayers may be eligible for federal, state, and local programs that reduce total tax liability. Income tax deductions are only one of the programs made available to older adults. Property tax relief for senior citizens, sometimes referred to as a homestead exemption, is available in many areas to qualifying individuals.
Before looking for loans to satisfy taxes, you should check into available deductions, special programs, and other services designed for those older than 65. Seeking out assistance from a tax relief professional can maximize tax year savings.
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 you must 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.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.