The perks of aging
Once you turn 50, and especially after age 65, you can qualify for extra tax breaks. Older people get a bigger standard deduction, and they can earn more before they have to file a tax return at all. Workers over 50 can also defer or avoid taxes on more money using retirement and health savings accounts. Here are some ways to save money on taxes as you age.
Bigger standard deduction for seniors 65 and older
If you don’t itemize your tax deductions, you can claim a larger standard deduction if you or your spouse is age 65 or older. The standard deduction for seniors is $1,650 higher than the deduction for people younger than 65 who file as individuals. Married couples can increase their standard deduction by $1,300 if one member of the couple is 65 or older and $2,600 if they’re both at least age 65. If you or your spouse is blind, you may also qualify for a higher standard deduction.
Higher tax-filing threshold
Older people can earn a little bit more income than younger workers before they need to submit a tax return. People age 65 and older can earn a gross income of up to $14,050 before they are required to file a tax return for 2020, which is $1,650 more than younger workers. The tax-filing threshold is $27,400 for couples both age 65 and older, and $26,100 if only one spouse is at least age 65, compared to $24,800 for younger couples. However, people below the filing threshold may want to submit a tax return in order to qualify for tax credits or a refund of income tax that was withheld.
Property tax breaks
Property tax rules vary considerably by state and local jurisdiction. But in some places, people who are above a certain age and who also earn below a specific income level qualify for property or school tax deferrals or exemptions. For example, in Texas, homeowners age 65 and older are eligible for a $10,000 homestead exemption for school district taxes, in addition to the $25,000 exemption for all homeowners, and local jurisdictions can provide additional exemptions for seniors. Take a close look at the specific rules to qualify for property tax breaks in your area. You may need to fill out extra tax forms or an application before you can claim a property tax exemption.
Credit for the elderly or disabled
If you or your spouse is age 65 or older and you have a low income, you could be eligible to claim a tax credit for seniors. Retirees who qualify may be able to reduce their tax bill by taking the credit. You must have an adjusted gross income below $17,500 ($25,000 if both spouses are 65 and older) and nontaxable Social Security and pension income below $5,000 ($7,500 for couples) to claim the credit. If only one spouse qualifies for the credit, the adjusted gross income cutoff is $20,000. Younger people who are permanently disabled might also qualify for this credit.
Additional IRA deduction
Older workers can defer paying income tax on more money than younger people by contributing to an individual retirement account. Workers age 50 and older can save an additional $1,000 in an IRA for a total of $7,000 in 2020. A 50-year-old worker in the 24% tax bracket who maxes out his IRA would save $1,680 on his current tax bill, $240 more than the maximum possible tax break of $1,440 for a younger retirement saver in the same tax bracket. Low- and moderate-income seniors who contribute to a retirement account may additionally qualify for the saver’s credit.
401(k) catch-up contributions
Older workers with access to a 401(k) plan may be eligible to make catch-up contributions. Employees age 50 and older can defer paying income tax on $6,500 more than younger workers if they contribute that amount to a 401(k) plan, or a total of $26,000. An older worker in the 24% tax bracket who maxes out his 401(k) plan could save $6,240 on his current tax bill, $1,560 more than a younger worker in the same tax bracket could potentially save. Income tax won’t be due on this money until it is withdrawn from the account.
No more early withdrawal penalty
Younger workers who raid their retirement accounts are hit with a 10% early withdrawal penalty unless the money is used for a couple of specific purposes. However, once you turn age 59 1/2, you can withdraw money from an IRA for any reason without incurring the 10% tax. And if you leave your job at age 55 or later, you can begin penalty-free 401(k) distributions from the account associated with the job you most recently left at that time. However, income tax will be due on withdrawals from traditional retirement accounts at any age.
Qualified charitable distributions
Retirees are typically required to withdraw money from traditional retirement accounts and pay the resulting income tax bill. However, if you don’t need the money, you can avoid income tax on withdrawals from traditional retirement accounts if you make a qualified charitable distribution. Retirees ages 70 1/2 and older who transfer any amount up to $100,000 directly from their IRA to a qualified charity will not owe income tax on the transaction.
Higher HSA contribution limit
Workers with high-deductible health plans can claim a tax deduction on contributions to a health savings account. Distributions from these accounts are tax-free when used to pay for qualifying medical expenses. Individuals who are age 55 or older by the end of the tax year are eligible to contribute up to $4,600 to a health savings account in 2021, $1,000 more than their younger counterparts. However, you can no longer contribute to an HSA once you enroll in Medicare.
Free tax help
Older people can get help filing their taxes without having to pay an excessive hourly fee. The Tax Counseling for the Elderly program provides free tax assistance to those age 60 or older. IRS-certified volunteers assist older taxpayers with basic tax return preparation and electronic filing between Jan. 1 and April 15 each year. The TCE program specializes in tax issues seniors typically face, including tax questions about pensions and retirement benefits.
10 Tax Breaks for People Over 50:
— Bigger standard deduction.
— Higher tax-filing threshold.
— Property tax breaks.
— Credit for the elderly and disabled.
— Additional IRA deduction.
— 401(k) catch-up contributions.
— No more early withdrawal penalty.
— Qualified charitable distributions.
— Higher HSA contribution limit.
— Free tax help.
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Update 02/09/21: This story was published at an earlier date and has been updated with new information.