Tax Breaks for Older Adults and Retirees

Ways for seniors to save on their taxes

Mature couple doing paperwork using laptop
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Retirement has a lot to offer, which explains why so many taxpayers diligently save for it over the course of their lifetimes. There are those perks that money really can’t buy, like your grandchildren, and the things you’ve been saving for: travel, not going to work every day, or even just sleeping in late on a Monday morning.

The Internal Revenue Service (IRS) gets it. The U.S. tax code offers quite a few tax breaks exclusively to older adults, including a special tax credit just for seniors.

A Larger Standard Deduction

You won't have to pay taxes on as much of your income, because the IRS allows you to begin taking an additional standard deduction when you turn age 65.

For tax year 2020—the tax return filed in 2021—you can add an extra $1,650 to the standard deduction you’re otherwise eligible for if you’re single or you qualify as head of household. You can add $1,300 for each spouse who is age 65 or older if you’re married and file a joint return. Both of you need not have yet hit your 65th birthdays either. For tax year 2021 (which you file in 2022), these amounts increase to $1,700, and $1,350, respectively.

You must turn 65 by the last day of the tax year to qualify for this additional deduction, but the IRS says you actually turn 65 on the day before your birthday. That means you would qualify on December 31 if you were born on January 1—just in the nick of time to claim the extra deduction for that tax year.

Standard Deduction or Itemized Deductions—Which Is Better?

You have a choice between claiming the standard deduction instead of itemizing your deductions, but you can't do both. And the Tax Cuts and Jobs Act (TCJA) pretty much doubled the basic standard deductions for all filing statuses—the deduction you can claim before you claim the extra bonus deduction for being age 65 or older, making it a somewhat difficult decision.

As of tax year 2020, the tax return filed in 2021, the base standard deductions before the bonus add-on for seniors are:

  • $24,800 for married taxpayers who file jointly, and qualifying widow(er)s
  • $18,650 for heads of household
  • $12,400 for single taxpayers and married taxpayers who file separately

For tax year 2021, which you'll file in 2022, the standard deductions are:

  • $25,100 for married taxpayers who file jointly, and qualifying widow(er)s
  • $18,800 for heads of household
  • $12,550 for single taxpayers, and married taxpayers who file separately

Many older taxpayers may find that their standard deduction plus the extra standard deduction for age works out to be more than any itemized expenses they can claim, particularly if their mortgages have been paid off and they don't have that itemized interest deduction any longer. But you could gain a larger deduction for itemizing if you still have a mortgage and factor in things like property taxes, medical bills, charitable donations, and any other deductible expenses you might have.

A Higher Tax Filing Threshold

Your threshold for even having to file a tax return in the first place is also higher if you’re age 65 or older, because the filing threshold generally equals the standard deduction you’re entitled to claim.

Most single taxpayers must file tax returns when their earnings reach $12,400 in the 2020 tax year (the amount of the standard deduction), but you can earn up to $14,050 if you’re age 65 or older (the standard deduction plus the additional $1,650). You can jointly earn up to $26,100 if you or your spouse is or older, and you file a joint return. If you’re both 65 or older, you can earn up to $27,400.

Taxable Social Security Income

Your Social Security benefits might or might not be taxable income. It depends on your overall earnings.

Add up your income from all sources, including taxable retirement funds other than Social Security and what would normally be tax-exempt interest. Then add half of what you collected in Social Security benefits during the course of the tax year. The Social Security Administration (SSA) should send you Form SSA-1099 around the first day of the new year, showing you exactly how much you received.

You don’t have to include any of your Social Security as taxable income if the total of all your other income and half your Social Security is less than $25,000 and you’re single, a head of household, or a qualifying widow or widower. That increases to $32,000 if you’re married and filing a joint return, and it drops to $0 if you file a separate return after living with your spouse at any point during the tax year.

If you fall outside of these income levels, up to 85% of what you collect in Social Security might be taxable.

The IRS offers an interactive tool to help you determine whether any of your Social Security is taxable and, if so, how much.

Tax Credits for Older Adults

One of the most significant tax breaks available to older adults is the Tax Credit for the Elderly and Disabled. This tax credit can wipe out some, if not all, of your tax liability if you end up owing the IRS.

You must be age 65 or older as of the last day of the tax year to qualify. That January 1 rule applies here, too—you’re considered to be age 65 at the end of the tax year if you were born on the first day of the ensuing year. You must be a U.S. citizen or a resident alien, but if you’re a non-resident alien, you might qualify if you’re married to a U.S. citizen or a resident alien.

You must file a joint married return with your spouse to claim the credit if you’re married, unless you didn’t live with your spouse at all during the tax year. And you won’t be eligible for this credit if you earn more than the following:

  • $17,500 or more and your filing status is single, head of household, or a qualifying widow or widower
  • $20,000 or more and you’re married, but only one of you otherwise qualifies for the credit
  • $25,000 or more, and you file a joint married return
  • $12,500 or more, and you file a separate married return, but you lived apart from your spouse all year

These numbers are based on your adjusted gross income (AGI), not your total income. Your AGI is arrived at after taking certain deductions, also known as "adjustments to income," on Schedule 1.

Limits also apply to the nontaxable portions of your Social Security benefits, as well as to nontaxable portions of any pensions, annuities, or disability income you might have. Those limits are as follows:

  • $5,000 or more, and your filing status is single, head of household, or qualifying widow or widower
  • $5,000 or more, and you’re married, but only one of you otherwise qualifies for the credit
  • $7,500 or more, and you file a joint married return
  • $3,750 or more and you file a separate married return, but you lived apart from your spouse all year

Unfortunately, you won’t qualify for the credit unless your income meets both of these thresholds. If you do qualify, the amount of the credit ranges from $3,750 to $7,500 as of tax year 2020.

Frequently Asked Questions (FAQs)

Which states provide the best tax breaks for retirees?

Many states exempt Social Security income from taxation, and some states don't tax income at all. The best states to retire for tax reasons are currently Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania.

How do you earn tax breaks in your retirement years?

Once you turn 65, you automatically have a larger standard deduction available, so be sure you're taking advantage of that if you're not itemizing deductions. When you reach age 70 and a half, you can also reduce your tax liability by giving some of your IRA distributions directly to a charity. This counts toward your required minimum distributions. Talk to your financial advisor about other ways to lower your taxes in retirement.

Do you have to pay income tax after age 70?

A portion of your income from Social Security, pensions, disability, and annuities is nontaxable, but if you make more than the limits, you will still have to pay some taxes after age 70.