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7 Tax Breaks for Retirees

Every bit of tax savings helps

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If you’re a retiree, you probably don’t have employment income. But just because you’re no longer working — and thus can no longer contribute to your employer-sponsored 401(k) plan and take a tax deduction for doing so — it doesn’t mean there aren’t ways to lower your tax bill.

More than 32 million Americans age 65 and over with no disability are no longer in the workforce, according to the Federal Reserve. What’s more, 17 million Americans 65 and older are economically insecure — living at or below 200 percent of the federal poverty level, or $27,180 for a single person in 2022, National Council on Aging data shows. Whether you are comfortably retired or out of the workforce for good and struggling, every dollar saved on taxes helps.

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As millions of Americans wrangle their federal income tax returns for 2023 by the looming April 15 deadline, here are seven unique ways retirees can lower the amount they may owe to the Treasury Department, the Internal Revenue Service’s overseer, this filing season and going forward.

Larger standard deduction

The standard deduction is the specific dollar amount, set each year by the IRS, that lowers the amount of income on which you pay tax. Think of it as the tax agency’s mass-market tax reducer.

For returns now being filed on 2023’s income, the deduction is $13,850 for single people, and twice that, or $27,700, for married couples filing jointly. Those filing as head of household get $20,800.

People over 65 or blind get an extra boost: $1,850 for those filing single or head of household, and $1,500 for married couples or qualifying surviving spouses.

Higher filing threshold

Older people can earn a bit more income than younger workers before they have to file a federal return. You may not be retired yet, but if you’re at least 65, several thousand extra dollars of income can go untaxed. 

Individuals under 65 at the end of 2023 have to file a federal return in 2024 if their income last year was at least $13,850 ($20,800 for taxpayers filing as head of household, and $27,700 for married couples filing jointly or a qualifying surviving spouse.) 

But once you cross that 65-year milestone, you can earn more income before you’re required to file a return. Here’s where the higher standard deduction comes into action — via the higher income levels set for older taxpayers. As you can see, the deduction amounts are the same as the income thresholds:

Estimate Your 2023 Taxes

AARP’s tax calculator can help you predict what you’re likely to pay for the 2023 tax year.

Individuals 65 or older at the end of 2023 must have gross income of at least $15,700 (versus $13,850 for younger workers) to be required to file a return. Heads of household are at $22,650 (versus $20,800). If one spouse in a married couple filing jointly is over 65, the threshold is $29,200 (versus $27,700). If both spouses are over 65, it’s $30,700. A surviving spouse over 65 is at $29,200.

Itemizing long-term care expenses

When taxpayers have hefty medical and insurance expenses related to long-term care, itemizing them instead of taking the standard deduction can produce a significant tax advantage. 

To itemize medical and insurance expenses, they must both exceed the standard deduction and outstrip 7.5 percent of your adjusted gross income for the year. AGI is that all-important measure of taxable income consisting of wages, dividends, capital gains, and business and retirement income, minus adjustments including self-employment taxes, student loan interest and contributions to traditional IRAs.

The Department of Health and Human Services estimates that an American turning 65 in 2022 will incur $120,900 in future long-term services and support costs over their lifetime. Average annual costs in 2021 ranged from $20,280 (for adult health day care) to $108,405 (for a private room in a nursing home), according to the most recent data from insurer Genworth. The numbers can run well over the standard deduction, so itemizing long-term care insurance premiums and qualified medical and dental expenses (including hospital, nursing home and rehabilitation care, prescription drugs, false teeth, wheelchairs and weight loss and nutrition programs) is worth it.

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The spousal IRA

Older taxpayers, including some retirees, can kick extra dollars into a traditional individual retirement account or its Roth cousin. But there’s only one way to do that if you’re retired, and only one of the accounts yields a tax deduction.

To contribute to a traditional or Roth IRA, you generally have to have earned income. In other words, you’re not retired. 

But there’s a loophole: A nonworking spouse can open and contribute to either type of IRA, provided that the other spouse is working and the couple files a joint return.

Traditional IRAs are funded with either pretax or posttax dollars. Only pretax contributions are deductible; after-tax ones aren’t. With pretax accounts, the money grows tax deferred, and you pay ordinary income tax rates on withdrawals, which you have to start making once you reach age 73. With posttax IRAs, you have to carefully document contributions to the IRS to avoid paying tax — again — on withdrawals.

By contrast, Roth plans are funded with after-tax dollars, so there’s no deduction come tax time for contributions. Withdrawals of earnings are free of ordinary income tax and penalties once you hit age 59½ and have had your account for at least five years. Roths don’t have required minimum distributions (RMDs), unless you inherited the account from someone other than a spouse. And you have to have earned income, from wages and the like, to contribute to one.

For tax year 2023, for which returns are now being filed, the contribution limit for those age 50 and older is $6,500, plus a $1,000 catch-up amount for a total of $7,500. Taxpayers have until this year’s April 15 filing deadline to make contributions for 2023. So a nonworking (either retired or stay-at-home) spouse with an account still has time to get a tax deduction.

Credit for the elderly or the disabled

This tax break lets individuals and couples with very low income reduce the amount of income tax they owe. Taxpayers must be 65 or older by the end of 2023, or retired on permanent and total disability and have taxable disability income. The credit, which ranges from $3,750 to $7,500, reduces a tax bill dollar for dollar. It’s nonrefundable, meaning that if it exceeds the amount of tax you owe, you don’t get the remainder as a cash refund. Taxpayers claiming the credit can’t have income at or exceeding $12,500 to $25,000, depending on their marital and filing status.

HSA contributions

The powerful tax beauty of a Health Savings Account, or HSA, is threefold. 

Contributions are made with pretax dollars, which reduces your overall taxable income and thus the taxes you owe. As long as the account’s dollars are used for approved health care expenses, withdrawals are tax free. Some HSAs invest in stocks, mutual funds or exchange-traded funds, and the gains they notch over time are also tax free. It’s a triple-bagger come tax time.

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Like with IRAs, you have until April 15 to make a contribution to an HSA. For tax year 2023, individuals can kick in up to $3,850; for family plans, the limit is $7,750. People 55 and older can throw in an extra $1,000.

Still, there are a few catches. 

The accounts are available only through health insurance plans sponsored by employers and through the Affordable Care Act marketplace. The rub is that you have to be enrolled in a high-deductible health plan to contribute to an HSA. This year, such plans have a minimum deductible of $1,600 for individuals and $3,200 for families, and a maximum out-of-pocket limit of $8,050 for single coverage and $16,100 for family coverage. Nearly 3 in 10 covered workers were enrolled in a high-deductible plan in 2021, according to Peterson-KFF Health System Tracker.

An HSA’s pretax contributions lower your adjusted gross income — that all-important measure of taxable income consisting of wages, dividends, capital gains, business and retirement income, minus adjustments including self-employment taxes, student loan interest and contributions to traditional IRAs. That means an HSA account can put a person with steep medical costs closer to the 7.5 percent threshold needed to itemize medical costs not paid through the HSA.

Charitable donations

Distributing funds from your traditional IRA to a charity recognized by the IRS kills several birds with one stone.

A qualified charitable distribution (QCD) counts toward your required minimum distributions (RMDs) that set in once you turn 73. It benefits a nonprofit. And it lowers your taxable income, in turn potentially reducing the taxes owed on Social Security benefits, and Medicare surcharges and keeping you out of a higher tax bracket.

In tax terms, a QCD is an exclusion — meaning an item on which you don’t pay taxes — and not a deduction, which is an item that reduces the total income on which you pay tax.

For a QCD to count toward your current year’s RMD, the money must come out of your IRA by your RMD deadline, typically Dec. 31. Taxpayers can shift out up to $100,000 for tax-free charitable giving for 2023. The threshold for 2024 rises to $105,000. Because QCDs can start at age 70½ — before retirees must take RMDs — doing them earlier can move money from an IRA and help you avoid being pushed into a higher tax bracket once distributions are required. A QCD isn’t deductible, but regardless of when it’s made, it can lower your taxable income.

While a taxpayer can make a QCD from a Roth IRA, there’s no additional tax benefit to doing so, as the accounts are already exempt from tax and distributions aren’t deductible.

Some nonprofits, including private foundations and donor-advised funds, don’t qualify for QCDs. But starting last year, the law known as SECURE 2.0 said that taxpayers could use the distributions to fund a Charitable Remainder UniTrust, charitable remainder annuity trust or charitable gift annuity, up to a maximum one-time sum of $50,000.

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