In the United States, senior citizens or the elderly refer to persons aged 65 and above. On the other hand, retirees refer to people who have left the workforce for good–whether voluntarily or by reaching the full retirement age of 67 years.
As tax season approaches, it is essential to recognize the benefits and credits available for them. Since most of them no longer work, knowing the tax deductions can help them budget their pensions and benefits better.
To get you started, here are six tax deductions for seniors and retirees to help in their next financial planning session.
1. Charitable Deductions
For retirees, making tax-exempted investments early on is a great way to enjoy tax-deducted income upon retirement. One example is a charitable remainder trust (CRUT). It is a financial planning tool that puts assets into a trust. It then pays income to the named beneficiary (or the donor himself) for a set period or a lifetime. Afterward, the remaining value in the trust fund goes to a charitable organization of the donor’s choice.
One way to maximize your CRUT is to defer income payments to a future date. The payments made from a CRUT are tax exempted. Additionally, cash-funded trust funds allow the donor to use charitable deductions for up to 60% of their adjusted gross income. These tax exemptions only get higher once you reach the age of 65.
2. Changes in Tax Filing Threshold
Some factors affect which tax bracket you will be for the tax season. For example, self-employed individuals or small business owners must file tax returns should they make more than $400 a year. A common misconception regarding tax filing thresholds is that moving into a higher bracket doesn’t necessarily equate to all income being taxed at higher rates.
Seniors usually enjoy a higher gross income threshold for filing, provided that they are at least 65 years old at the end of the tax year.
3. Social Security Taxes
Most people might not be aware that earnings from your Social Security benefits are generally exempted from federal income taxes. There’s no need to pay income taxes for individuals who earn less than $25,000 per year, including social security. If your annual earning is over $25,000 and below $34,000, you’ll be required to pay only half (50%) of your benefits on the following income tax filing.
However, there’s a difference for married people since the thresholds are different and the joint income is taken into consideration. If a senior citizen and the spouse earn more than $32,000 and below $44,000, you must pay taxes for 50% of the benefits. Anything more than this threshold is required to pay for 85% of their benefits.
For retirees below the age of 65, if they have little income aside from their Social Security, they usually don’t get taxed. In some cases, they are no longer required to file a return.
4. Increased Standard Deduction for Seniors
Once you reach senior citizenship, the general standard deduction increases. This deduction refers to the part of your income that is not subject to tax. More importantly, it can be used to reduce further your tax bills instead of itemizing the deductible items–a practice that is usually more time-consuming.
However, the increased standard deduction for seniors is dependent on a number of factors and a changing rate every year. For 2022, the Internal Revenue Service has released updated standard deduction guidelines, increasing the deduction for seniors to $14,700. Taking your standard deduction makes it easier to file taxes.
5. Medical Expense Deductions
Old age is often associated with increasing medical needs. To help alleviate the financial woes that come with it, you should be familiar with tax deductions for qualified medical expenses. Taxpayers generally can itemize and declare their medical bills for tax deductions, which is a more significant help for the elderly shouldering healthcare expenses.
Generally, medical expenses that exceed 7.5% of the taxpayer’s adjusted gross income are tax-deductible. However, certain health expenses like health clubs or supplements are not included. Usually, the tax break includes medical procedures like therapy and surgery, prescription drugs, health insurance premiums, and senior care like adult day services or in-home help.
6. Deductions from Businesses and Hobbies
Senior citizens and retirees usually take their time off to start their own businesses or engage in hobbies. However, the IRS makes particular distinctions between a business and a hobby, especially if you’re earning income from doing either activity.
Essentially, businesses are intended to make a profit while hobbies are for sport or recreation purposes only. For business owners, several relevant expenses can be listed as tax deductions.
When you retire or reach old age, specific tax rules change or become available to you. These tax breaks, deductions, and credits are designed to help you enjoy the fruits of your hard work from the previous years. By learning what applies to you, you can avoid paying unnecessary taxes, allowing you to keep more to yourself and enjoy life more.