Tax Changes for Retirees
- Higher Standard Deductions. Once you reach age 65, you are eligible for a higher standard deduction. This increases the portion of your income that is non-taxable, thus reducing your tax bill.
- Tax Credit for the Elderly. While many of us do not consider 65 to be “elderly,” according to the IRS, you may qualify for this direct credit against your taxes. Be aware that income limitations apply, and there are additional limitations if your Social Security and other tax-free benefits exceed specified levels. We are happy to help you determine if you qualify for this credit.
- Social Security Tax Breaks. This is income-dependent. If the total of 50% of your Social Security benefits plus all other income is less than $25,000 for single filers or $32,000 for married filers, you will pay no tax on your Social Security benefits.
For easy math, let’s say that you are a single filer and your Social Security benefits equal $20,000 per year. Other forms of income are about $10,000. Half of $20,000 is $10,000 + $10,000 = $20,000. You would not have to pay taxes on your Social Security benefits.
If you exceed the $25,000 or $32,000 level, you will have to pay tax on up to 50% of your Social Security benefits. For seniors with high income levels, this increases to as much as 85%.
- Higher Return Filing Threshold. You have a higher standard deduction and you may not have to pay taxes on Social Security benefits. If so, you may not need to file a federal income tax return. Because you may need to file for other reasons, it is important to check with your financial advisor or tax preparation professional.
- Higher Contributions. You may be able to contribute higher amounts to your retirement accounts when you reach age 50. At 55, you can also contribute extra amounts to a health savings account. Many people opt to do this as they prepare for retirement.
- Reverse Mortgage. Are you a homeowner who is at least 62 years old? Then you can use a reverse mortgage in which your lender makes loan advances to you. This has a few benefits: it converts your home into nontaxable income, and it does not have to be repaid until your death. You will have to repay the loan and accrued interest if you sell your home or move, but you will not pay more than your home is worth.
- Home Sales. Speaking of selling your home: if you plan to move or downsize when you retire, you can keep up to $250,000 (single filers) or $500,000 (married filers) of the profit tax-free.
We want you to enjoy a happy, secure retirement. If you have questions about these tax situations or need assistance navigating your own financial needs as you prepare for the next chapter of your life, please contact Faw & Associates.