Tax Breaks For Retirees

Taxes can be a major drain on income in retirement, so it's important to take full advantage of every tax break available. Here are seven tax breaks retirees don't want to miss.

1. Higher standard deduction

When you file your tax return, you have the option of itemizing deductions or claiming the standard deduction. Itemizing involves claiming all of your actual expenses for things like medical expenses, state and local taxes, mortgage interest, and charitable deductions. The standard deduction is a fixed amount based on your filing status.

For people under age 65, the normal standard deductions on 2023 returns are $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of household.1 But people age 65 or older get to claim a higher standard deduction.

For 2023 tax returns, the standard deduction for a single taxpayer age 65 or older is $15,700. For married couples filing jointly, if only one spouse is age 65 or older, your standard deduction would be $29,200, or $30,700 if both spouses meet the age threshold. If you file as head of household, your increased standard deduction would be $22,650.

If one or both taxpayers are 65 or older and blind, you qualify for an even higher standard deduction amount. The standard deduction chart in the IRS Instructions for Form 1040 can help you calculate the standard deduction available on your tax return.2

2. Dental and medical expenses

Healthcare costs are some of the biggest expenses people face in retirement. The silver lining is that some of these costs may be tax deductible.

To qualify, you have to itemize deductions on Schedule A.3 You can only deduct medical expenses that exceed 7.5% of your adjusted gross income (Line 8b of Form 1040-SR).4 However, deductible medical expenses include not only insurance premiums, payments to hospitals and doctors, and prescription medications, but also things like insulin supplies, home health aides, hearing aids, and eyeglasses.

Don't forget to include the miles you drive for medical care. On your 2023 tax return, deductible medical expenses include 22 cents per mile when you are driving for medical purposes.5 For a complete list of deductible medical expenses, check out IRS Publication 502.6

3. Tax credit for the elderly or disabled

The Credit for the Elderly or Disabled gives taxpayers age 65 or older (or retired on permanent and total disability) a tax credit ranging from $3,750 to $7,500 per year depending on your filing status and total taxable disability income.

To qualify, your income must fall below a set limit for your filing status. You can't claim the credit if one of these applies:

• Your adjusted gross income is $17,500 or more ($25,000 if married filing jointly and both spouses are 65 or older)

• You received $5,000 or more of nontaxable Social Security or other nontaxable pension or disability benefits ($7,500 or more if married filing jointly and both spouses qualify for the credit)

You can claim the credit by completing Schedule R7 and filing it with your tax return.

4. Selling a home

Downsizing to a smaller home in retirement can reduce your monthly expenses and make it easier to maintain your home. Plus, if your home has increased in value since you purchased it, selling it can give you tax-free income.

If you've owned and lived in the home for at least two out of the last five years, the first $250,000 of profit is tax-free. For married couples filing jointly, the tax-free amount doubles to $500,000.

5. Charitable donations and volunteer experiences

If you itemize deductions, you can also deduct contributions made to qualified charitable organizations. This includes cash donations, as well as non-cash contributions, such as used clothing and household items.

Don't forget to track the miles you drive while volunteering. Your deduction for charitable donations can include 14 cents per mile for such work.8

6. Charitable donations and volunteer experiences

Many retirees continue working part-time in retirement, either because they enjoy working or want to have enough money to enjoy retirement long into the future.

Working people age 50 or older can contribute up to $7,500 to an IRA for 2023.9 Previously, contributions to traditional IRAs weren't allowed after age 70, but the SECURE Act removed those age restrictions.10 The SECURE 2.0 Act increased the age at which individuals must start taking required minimum distributions to 73 (if you reached age 72 after December 31, 2022).11

This means a working person over the age of 73 could potentially be contributing to an IRA while simultaneously required to take out minimum distributions in the same year.

Roth IRA contributions aren't deductible, but you may be able to deduct contributions to a traditional IRA, depending on your income and whether you are covered by a retirement plan at work.12

7. Investment contributions

Before the Tax Cuts and Jobs Act of 2017 (TCJA), taxpayers who itemized on Schedule A could deduct various investment expenses - such as investment management fees and financial planning fees - as miscellaneous itemized deductions. Miscellaneous itemized deductions also included things like unreimbursed job expenses and tax preparation fees.

The TCJA eliminated most miscellaneous itemized deductions, but you can still deduct investment interest expense on Line 9 of Schedule A.13 Investment interest expense is interest paid on money borrowed to purchase taxable investments, and it includes margin loans for buying stocks in your brokerage account.14 The amount you can deduct is capped at your net taxable investment income for the year.

Talk with a tax professional to ensure you're getting the most out of your available deductions.