Tax Breaks for Seniors and Retirees

Older Taxpayers May Qualify for a Few Tax Breaks

Mature couple doing paperwork using laptop
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Growing older isn’t something most people look forward to. Sure, not having to go to work every day has its appeal, but living on a fixed income has its drawbacks. The Internal Revenue Service is actually sympathetic. The tax code offers a few breaks for those who are getting up in years.

You Get a Larger Standard Deduction

You won't have to pay taxes on as much of your income when you get older because the IRS allows you to take an additional standard deduction if you’re age 65 or older.

If you’re single or file as head of household, you can add an extra $1,550 to the standard deduction you’re otherwise eligible for as of 2017. If you’re married, you can add $1,250 for each spouse who is age 65 or older.

You must turn 65 by the last day of the tax year, but here’s a catch: The IRS says you actually turn 65 on the day before your birthday. Therefore, if you were born on January 1, you qualify as of December 31—just in the nick of time to claim the extra deduction for that tax year.

The standard deduction is claimed in lieu of itemizing your deductions, but you would have to have incurred a lot of qualifying expenses to make itemizing worth your while anyway. Most elderly taxpayers find that their standard deduction plus this extra standard deduction works out to be more than any itemized expenses they could claim, particularly if the mortgage has been paid off so they don't have that interest deduction any longer.

 

You Have a Higher 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. In other words, you can earn more money before you have to roll up your shirtsleeves and start crunching numbers for the IRS. Most single taxpayers must file tax returns when their earnings reach $10,350 as of 2017.

But if you’re 65 or older, you can earn up to $11,900 before you have to concern yourself with sharing any of that with Uncle Sam.

This applies to all filing statuses. If you’re married and filing jointly and both you and your spouse are under age 65, you can only collectively earn up to $20,700 before you have to file a return. But if one of you is 65 or older, you can jointly earn up to $21,950, and if you’re both 65 or older, you can earn up to $23,200.

You May Not Have to Pay Taxes on Your Social Security Income

So what exactly counts as your taxable income? Your Social Security income may or may not be included. Here’s how it works.

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

If the total of all your other income and half your Social Security is less than $25,000 and you’re single, head of household, or a qualifying widow or widower, you don’t have to include any of your Social Security as taxable income.

If you’re married and filing a joint return, the limit goes up to $32,000.

You might want to file a joint return because if you file a separate return, you’ll have to pay taxes on at least some of your taxable income unless you did not live with your spouse at any time during the tax year. In this case, the threshold reverts back to $25,000. But check with a tax expert to make sure that filing a joint married return is in your overall best interests considering your personal circumstances.  

If you fall outside these income perimeters, up to 85 percent of what you collected in Social Security might be taxable. The IRS offers an interactive tool to help you determine if any of your Social Security is taxable and, if so, how much.

The Tax Credit for the Elderly and Disabled

One of the most significant tax breaks available to seniors and retirees is the tax credit for the elderly and disabled.

If you end up owing the IRS, this credit can wipe out some, if not all, of your tax liability. 

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 or, if you’re a non-resident, you may qualify if you’re married to a U.S. citizen or a resident alien. If you’re married, you must file a joint married return with your spouse to claim the credit unless you didn’t live with your spouse at all during the tax year. If you qualify for head of household filing status, this allows you to claim the credit if your spouse didn’t live with you after June 30, although a multitude of other rules also apply to claiming this status.

The last qualifier relates to your income. You won’t be eligible for this credit if you earn too much:

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

These numbers are based on your adjusted gross income, not your total income. Your AGI is arrived at after taking certain deductions on the first page of your tax return. You can find it on line 38 of Form 1040, or line 22 if you file Form 1040A.

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:

  • $5,000 or more if your filing status is single, head of household or qualifying widow or widower
  • $5,000 or more if you’re married but only one of you otherwise qualifies for the credit
  • $7,500 or more if you file a joint married return
  • $3,750 or more if 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 these thresholds. If you go over in either category, you’re out of luck. If you do qualify, the amount of the credit ranges from $3,750 to $7,500 as of 2017. You can erase this much off your tax bill, although the credit is nonrefundable so the IRS won’t be sending you a check for any unused balance after your tax obligation for the year is eliminated.

There you have it. Aging comes with a few tax perks, so relax and enjoy some of that money you won’t have to give to the IRS. 

NOTE: Tax laws change periodically so always consult with a tax professional for the most up-to-date advice. This information is not intended as tax advice and is not a substitute for tax advice.