Tax Breaks for Seniors and Retirees
Older Taxpayers May Qualify for a Few Tax Breaks
Growing older isn’t something most people look forward to. Sure, the idea of not having to go to work every day is appealing, but living on a fixed income has its drawbacks. The Internal Revenue Service is actually sympathetic. The U.S. tax code offers a few breaks for those who are getting up in years, including a special tax credit just for seniors.
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 begin taking an additional standard deduction when you turn 65. For 2020, if you’re single or you file as head of household, you can add an extra $1,650 to the standard deduction you’re otherwise eligible for.
If you’re married and you file a joint return, you can add $1,300 for each spouse who is age 65 or older. Both of you don't have to have yet hit your 65th birthday. If even one of you has, that's good enough for the IRS and you can claim one of the additional deductions.
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. If you were born on January 1, you would qualify as of December 31—just in the nick of time to claim the extra deduction for that tax year.
The following table summarizes some of the standard deduction changes and compares taking the standard deduction to itemizing your expenses.
A new, larger standard deduction means you'll pay taxes on a smaller base of income
The regular standard deduction plus the new standard deduction for age will likely save you much more money than itemizing
Helps those who have paid off their mortgage and no longer have an interest deduction
Can result in a larger deduction if you still have mortgage interest, large charitable donations, and other expenses that exceed the standard deduction
Can no longer itemize expenses if you choose the standard deduction
Personal exemption no longer exists
Need much larger amount of expenses to beat the deduction threshold
Standard Deduction or Itemizing Deductions—Which Is Better?
Keep in mind that the standard deduction is claimed in lieu of itemizing your deductions—you can't do both. But you would have to have incurred a lot of qualifying expenses to make itemizing worth your while anyway, particularly in 2018.
The Tax Cuts and Jobs Act (TCJA) pretty much doubled standard deductions for all filing statuses—the standard deduction you can claim before you claim the extra bonus deduction for being age 65 or older. These deductions are in place from 2018 through at least 2025:
- The standard deduction for single filers and those who are married but file separate returns increased from $6,350 to $12,000 in 2018 ($12,200 in 2019, and $12,400 in 2020)
- The standard deduction for head of household filers increased from $9,350 to $18,000 ($18,350 in 2019, and $18,650 in 2020)
- The standard deduction for qualifying widow(ers) and married filers of joint returns increased from $12,700 to $24,000 ($24,400 in 2019, and $24,800 in 2020)
Most older taxpayers find that their standard deduction plus the extra standard deduction for age works out to be significantly more than any itemized expenses they could claim, particularly if their mortgages have been paid off so they don't have that itemized interest deduction any longer.
However, if you still have a mortgage, you could gain a larger deduction by itemizing. Factor in property taxes, medical bills, charitable donations, and any other deductible expenses you might have. While many deductible expenses are subject to caps and limitations, tally up these amounts if you think they're significant enough to exceed the new, higher standard deduction.
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. 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 $12,000 as of 2018. But if you’re 65 or older, you can earn up to $13,600 before you have to concern yourself with sharing any of that with Uncle Sam, and if your only income is Social Security, you might not have to include your benefits.
If you’re married and filing jointly and both you and your spouse are under age 65, you can collectively earn up to $24,000 before you have to file a return. But if one of you is 65 or older, you can jointly earn up to $25,300, and if you’re both 65 or older, you can earn up to $26,600.
In years 2017 and earlier, the filing threshold was the standard deduction plus the additional standard deduction for your filing status plus the amount of the year's personal exemption. But there's no more personal exemption as of 2018—the TCJA eliminated that provision from the tax code—so now from 2018 until at least 2025, it's the equivalent of the two standard deduction amounts.
But that's still more than it was in 2017 because the standard exemption amounts have increased so much.
You Might Not Have to Pay Taxes on Your Social Security Income
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 benefits 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 you’ll have to pay taxes on at least some of your benefits if you file a separate married return unless you did not live with your spouse at any time during the tax year. The threshold is $25,000 if you did not, but otherwise, it's $0. 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% 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 alien, you might 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.
Keep in mind that the IRS often issues a new Form 1040 for different tax years. It replaces the old 1040 forms, so lines may be different going forward. But your adjusted gross income should clearly be labeled.
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 2018.
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.
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.
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