Retirement has a lot to offer, which explains why so many taxpayers diligently save for it over the course of their lifetimes. There are those perks that money really can’t buy, like your grandchildren, and the things you’ve been saving for: travel, not going to work every day, or even just sleeping in late on a Monday morning.
The Internal Revenue Service (IRS) gets it. The U.S. tax code offers quite a few tax breaks exclusively to older adults, including a special tax credit just for seniors.
You won't have to pay taxes on as much of your income, because the IRS allows you to begin taking an additional standard deduction when you turn age 65.
For tax year 2021—the tax return you file in 2022—you can add an extra $1,700 to the standard deduction you’re otherwise eligible for, as long you are unmarried and not a surviving spouse. You can add $1,350 for each spouse who is age 65 or older if you’re married and file a joint return. Those numbers increase to $1,750 and $1,400 in tax year 2022.
To qualify for this deduction, you must turn 65 by January 1 of the following tax year.
You have a choice between claiming the standard deduction instead of itemizing your deductions, but you can't do both. And the Tax Cuts and Jobs Act (TCJA) pretty much doubled the basic standard deductions for all filing statuses—the deduction you can claim before you claim the extra bonus deduction for being age 65 or older, making it a somewhat difficult decision.
As of tax year 2021, the base standard deductions before the bonus add-on for seniors are:
The standard deductions after the bonus are:
Many older taxpayers may find that their standard deduction plus the extra standard deduction for age works out to be more than any itemized expenses they can claim, particularly if their mortgages have been paid off and they don't have that itemized interest deduction any longer. But you could gain a larger deduction for itemizing if you still have a mortgage and factor in things like property taxes , medical bills, charitable donations, and any other deductible expenses you might have.
Your threshold for even having to file a tax return in the first place is also higher if you’re age 65 or older, because the filing threshold generally equals the standard deduction you’re entitled to claim.
Most single taxpayers must file tax returns when their earnings reach $12,550 in the 2021 tax year (the amount of the standard deduction), but your deduction can go up to $14,250 if you’re age 65 or older (the standard deduction plus the additional $1,700). You can jointly earn up to $26,450 if you or your spouse is 65 or older, and you file a joint return. If you’re both 65 or older, your deduction could be $27,800.
Your Social Security benefits might or might not be taxable income. It depends on your overall earnings.
Add up your income from all sources, including taxable retirement funds other than Social Security and what would normally be tax-exempt interest. Then add half of what you collected in Social Security benefits during the course of the tax year. The Social Security Administration (SSA) should send you Form SSA-1099 around the first day of the new year, showing you exactly how much you received.
You don’t have to include any of your Social Security as taxable income if the total of all your other income and half your Social Security is less than $25,000 and you’re single, a head of household, or a qualifying widow or widower. That increases to $32,000 if you’re married and filing a joint return, and it drops to $0 if you file a separate return after living with your spouse at any point during the tax year.
If you fall outside of these income levels, up to 85% of what you collect in Social Security might be taxable.
The IRS offers an interactive tool to help you determine whether any of your Social Security is taxable and, if so, how much.
One of the most significant tax breaks available to older adults is the tax credit for the elderly and disabled . This tax credit can wipe out some, if not all, of your tax liability if you end up owing the IRS.
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, but if you’re a non-resident alien, you might qualify if you’re married to a U.S. citizen or a resident alien.
In general, you must file a joint married return with your spouse to claim the credit if you’re married, unless you didn’t live with your spouse at all during the tax year. And you won’t be eligible for this credit if you earn more than the following:
These numbers are based on your adjusted gross income (AGI), not your total income. Your AGI is arrived at after taking certain deductions, also known as "adjustments to income," on Schedule 1.
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. Those limits are as follows:
Many states exempt Social Security income from taxation, and some states don't tax income at all. The best states to retire for tax reasons are currently Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania.
Once you turn 65, you automatically have a larger standard deduction available, so be sure you're taking advantage of that if you're not itemizing deductions. When you reach age 70 and a half, you can also reduce your tax liability by giving some of your IRA distributions directly to a charity. This counts toward your required minimum distributions. Talk to your financial advisor about other ways to lower your taxes in retirement.
A portion of your income from Social Security, pensions, disability, and annuities is nontaxable, but if you make more than the limits, you will still have to pay some taxes after age 70.