After age 50, and especially at 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. The standard deduction is $7,850 for taxpayers age 65 and older in 2016, which is $1,550 more than the standard deduction for younger people. “If you don’t itemize and you claim the standard deduction, there is an additional amount if you are 65 or older,” says Barbara Weltman, spokeswoman for “J.K. Lasser’s Your Income Tax 2016.” For married couples the standard deduction climbs by $1,250 for each spouse who was born before Jan. 2, 1951, or $15,100 if both spouses are age 65 or older.
Higher tax filing threshold. People age 65 and older can earn a gross income of up to $11,850 ($23,100 for couples both age 65 and older) before they are required to file a tax return. That’s $1,550 (or $1,250 per spouse) more than the tax filing threshold for younger workers.
Property tax breaks. Property tax rules vary considerably by state and local jurisdiction. However, 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. “You may have to be 65 and have income below a certain amount, and not all localities do this,” Weltman says.
Additional IRA deduction. Workers age 50 and older can contribute an additional $1000 to an IRA, or a total of $6,500 in 2016. A 50-year-old worker in the 25 percent tax bracket who maxes out his IRA would save $1,625 on his current tax bill, $250 more than the maximum possible tax break of $1,375 for a younger retirement saver in the same tax bracket.
401(k) catch-up contributions. The tax savings is even bigger for older workers with access to a 401(k) plan. “Once you hit the magical age of 50, the contribution limits increase pretty substantially,” says MaryAnn Monforte, a professor of accounting at Syracuse University’s Whitman School of Management. “This is a great way to catch up on your retirement savings.” Employees age 50 and older can defer paying income tax on $6000 more than younger workers if they contribute that amount to a 401(k) plan, or a total of $24,000. An older worker in the 25 percent tax bracket who maxes out his 401(k) plan could save $6,000 on his current tax bill, $1,500 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 percent early withdrawal penalty, unless the money is used for a couple of specific purposes. However, once you turn age 59 ½, you can withdraw money from an IRA for any reason without incurring the 10 percent 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.
Avoid tax on required minimum distributions. After age 70 ½ you are typically required to withdraw money from your traditional retirement accounts and pay the resulting income tax bill. However, if you don’t need the money, there is one way to avoid income tax on withdrawals from retirement accounts. Retirees ages 70 ½ 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 contribution. “By directly rolling over the donation to a charity you are lowering your adjusted gross income, which in turn does other good things for you, such as make less of your Social Security taxable,” says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block. “If you normally give $1,000 every year to a charity and you have a $1,000 required minimum distribution, why not just combine the two?”
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 $4,350 to a health savings account, $1,000 more than their younger counterparts.
Lower threshold to deduct medical expenses. Most taxpayers can deduct medical expenses on their tax return that exceed 10 percent of their adjusted gross income. However, people who are age 65 or older are eligible to deduct medical costs that are more than 7.5 percent of their adjusted gross income. “If it’s a married couple, only one of them has to be 65 or older,” Perlman says. “You could have a 67-year-old and another spouse is only 61, but they both get that break.”