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 2019 returns are $12,200 for single filers, $24,400 for married couples filing jointly, and $18,350 for heads of household. But people age 65 or older get to claim a higher standard deduction.

For 2019 tax returns, the standard deduction1 for a single taxpayer age 65 or older is $13,850. For married couples filing jointly, if only one spouse is age 65 or older, your standard deduction would be $25,700, or $27,000 if both spouses meet the age threshold. If you file as head of household, your increased standard deduction would be $20,000.

If one or both taxpayers are 65 or older and blind, you qualify for an even higher standard deduction amount. The standard deduction worksheet in the IRS Instructions for Form 10402 can help you calculate the standard deduction available on your tax return.

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 2019 tax return, deductible medical expenses include 20 cents per mile5 when you are driving for medical purposes. That rate decreases to 17 cents per mile in 2020. 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 purchase 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.