It’s tax season, which means you might be someone who is feeling confused or overwhelmed at the prospect of filing taxes as a retired person. The added stress of deadlines and filling out required paperwork can be enough to make anyone dread this time of year!
Fear not. Tax deductions for seniors are available and relatively easy to understand.
The IRS offers several tax deductions for seniors, though not everyone knows about them. If you know what the 2023 standard deduction for seniors is, you are well on your way to successfully filing. However, there are other deductions and considerations to keep in mind as well for both federal and state taxes.
Knowing the right deductions to take can help you or your loved one maximize income and make solid financial decisions. You might also be able to find the extra money to live in a senior living community.
Here are the top 10 tax deductions for seniors and how you can take advantage of them.
1. Increased Standard Deduction
If your taxes are relatively simple — you’re not a small business owner, don’t give large sums to charity, and don’t itemize complex business deductions — then you probably already take the standard deduction.
When you’re over 65, the standard deduction increases. The specific amount depends on your filing status and changes each year. The standard deduction for seniors this year is actually the 2022 amount, filed by April 2023. For the 2022 tax year, seniors filing single or married filing separately get a standard deduction of $14,700. For those who are married and filing jointly, the standard deduction for 65 and older is $25,900. The standard deduction for a widow over 65 is also $25,900 if they qualify. Taking the standard deduction is often the best option and can eliminate the need to itemize. If you are blind, you can increase your standard deduction by $1,400 or $1,750 if single or if filing as head of household.
Looking to the new year, the 2023 IRS standard deduction for seniors is $13,850 for those filing single or married filing separately, $27,700 for qualifying widows or married filing jointly, and $20,800 for a head of household. If you are blind, you will be able to increase the standard deduction by $1,500 (or $1,850 if single or filing as head of household).
2. Different Filing Threshold
The filing threshold is the income you must earn before being required to file a tax return. Individual factors can affect your filing threshold. For example, if you are self-employed or a small business owner, you must file a tax return for any earnings over $400.
For typical taxpayers who are either employees or retired and drawing a pension or Social Security income, the filing threshold is much higher after age 65. Single filers under 65 must file a return when their income exceeds $12,400. Seniors don’t have to file a return until their income exceeds $14,050. Married filers over 65 do not need to file a joint return unless their income exceeds $27,400. If your sole or primary income source is Social Security or a pension, this may mean you do not have to file a return at all.
3. Social Security Tax Exemption
Many older adults ask themselves if Social Security is tax deductible. Social Security earnings are often exempt from federal income taxes. If you file as an individual and your Social Security and other earnings total less than $25,000 per year, you may not have to pay federal income taxes. If your Social Security and other earnings are between $25,000 and $34,000, you only have to pay income tax on half of your benefits.
For married people filing jointly, the threshold for paying any taxes on Social Security benefits is $32,000. If you jointly earn between $32,000-$44,000, you only have to pay taxes on 50% of your benefits. For individuals or couples who exceed the 50% earning threshold, 85% of benefits become taxable.
4. Business and Hobby Deduction
Some seniors start businesses as consultants when they retire. Others pick up new hobbies and become successful enough to sell on Etsy, at craft shows, or even in local stores. If either of these applies to you, you must pay income taxes on this self-employment income.
You might have additional deductions over 65 if you run a business. Those deductions include virtually all costs associated with running the business, including:
- Advertising expenses, such as the costs of a website or business cards.
- Supplies, such as craft-making tools or printing supplies.
- Home office expenses.
- Expenses paid to a consultant or employee to help you run your business.
- Business education expenses, such as books about business ownership or the cost of attending a conference.
5. Medical Expense Deduction
There is also the potential for tax-deductible medical expenses for seniors. You do have the option to itemize and deduct certain medical bills. For seniors with significant healthcare expenses, this can offer tax savings. You are allowed to deduct any medical expenses that exceed 7.5% of your adjusted gross income.
Although you can’t deduct general health expenses, such as vitamins or health club dues, you can deduct most professional medical fees, such as those paid to a doctor or dentist. You can also deduct:
- Prescription drug costs.
- Mental health expenses, such as the cost of therapy.
- The costs of glasses, dentures, or orthodontic appliances.
- Expenses incurred because of medical needs, such as parking fees paid at the doctor’s office.
- Health insurance premiums.
- The costs of senior care, such as in-home help or adult day services, that are offset by VA benefits or paid out of pocket. Is family caregiver taxable? Sometimes. Talk to your accountant to find out who needs to claim that income as well as if the senior can write off that amount as a deduction for medical expenses.
6. Elderly or Disabled Tax Credit
The tax credit for the elderly or the disabled allows you to deduct money from the total amount owed to the IRS. This is different from deductions, which come from your total taxable income. This credit can also get you a tax refund if the deducted amount exceeds the amount you owe the IRS.
To be eligible for this credit, you must be over the age of 65 or permanently disabled. Your income must not exceed certain levels, and those levels change from year to year. Be sure to work with your accountant if you believe you might be eligible for this deduction.
7. Charitable Deductions
You can deduct most charitable donations, including both money and property. For example, if you donate clothing to Goodwill, you can deduct the sale value of the clothing — not the original sale price.
In general, you can only deduct up to 60% of your adjusted gross income. If you donate significant amounts to charity or set up a foundation, talk to a tax planner about maximizing your tax benefits. How you structure your giving may change your tax liability.
8. Retirement Plan Contribution Benefits
Many seniors continue working past retirement age. Others keep contributing to their retirement accounts. Retirement plan contributions are often eligible for a saver’s credit that allows you to deduct a portion of the contribution from the amount owed to the IRS. This is distinct from a deduction, which only allows you to deduct from the amount of taxable income you claim.
9. Estate and Gift Tax
In 2022, you can give up to $12 million to your heirs without any penalty per estate law. This number increases to $12.9 million in 2023 ($25,86 for a married couple filing jointly).
You can also look into an annual gift tax exclusion. This allows you to give up to $16,000 each year to your heirs without worrying about paying a gift tax. This increases to $17,000 in 2023.
10. State Senior Tax Exemptions
Federal taxes aren’t the only tax burden seniors face. You may also have to file and pay state income taxes. State tax rules vary quite a bit, and the state in which you live can impact your tax liability.
Many states offer specific tax benefits to seniors, and it is common for states to not tax Social Security earnings. Below are some examples of state tax benefits and exemptions:
- In South Carolina, Social Security benefits are exempt from taxation. Further, adults age 65 or older can exclude up to $10,000 of retirement income.
- Some states — such as Tennessee, Arizona, and Colorado — do not tax inheritance or estate.
- Property taxes in states like Delaware are quite low, making living on a fixed income significantly easier.
- Several states, including Florida and Nevada, have no income tax.
If you’re helping a senior parent file their taxes, you will already be talking about finances, long-term plans, and healthcare. Consider also having a conversation about how your loved one wishes to spend their retirement. Reevaluate this plan each year as your loved one’s needs change.
As always, filing your taxes is much easier with the help of an experienced professional. Ensure the accountant or business you work with has experience working with seniors and their family members because they will know tax laws and deductions better than someone without that crucial experience.
This blog was updated in February 2023.