An advantage of turning 65 is qualifying for certain income tax exemptions and credits. Here are a few of the top 2020 tax breaks for seniors.
Tax season 2021 (for 2020 tax returns) is around the corner. Although the Internal Revenue Service (IRS) has not officially announced the date to start accepting electronic 2020 tax returns, it will likely be in mid-January. If you are wondering, “how turning 65 will affect my taxes,” it allows you to take advantage of these tax breaks for seniors.
Do Seniors Get a Tax Break?
Top Tax Break – Larger Standard Deduction for Seniors Over 65
The biggest tax break for seniors is the ability to take a larger standard deduction. The 2020 standard deductions are:
Single Taxpayers – $12,400
Married Taxpayers who file jointly & Widow/Widowers – $24,800
Head of Household – $18,650
For tax year 2020, seniors over 65 can add an extra $1650 if they file as single or head of household. Married couples filing jointly can add $1300 for each spouse that is over 65. You must turn 65 on or before January 1 of the tax year (January 1, 2020 for taxes filed in 2021) to qualify.
Top Tax Break – Higher Income Exemption for Seniors
Those over 65 have a larger amount of income exempted from taxes. Single tax filers over 65 can have the first $14,050 of income exempted from taxes (up from the standard $12,400). Married couples filing jointly can earn up to $27,400 if both are over 65; $26,100 if one spouse is over 65 (up from $24,800).
Standard versus Itemized Deductions
Per IRS rules, you can take either the standard deduction or you can itemize – you cannot do both. With the larger standard deduction for over 65, most senior find it is advantageous to take that deduction. However, if you own a home or business or have large medical or charitable contributions, itemizing may make more sense. Which leads to the next top 2020 tax breaks…
Top Tax Break for 2020 – Special Charitable Contribution
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, you can deduct up to $300 in charitable contributions as an above the line deduction. You do not have to itemize to take advantage of it. Since this tax break may not be extended for 2022, if you are looking to give money to your favorite organization, it will be better to donate in 2020 rather than next year. In addition, you can deduct the fair market value of any items donated (vehicles, property, etc.).
Top Tax Break for Seniors – Deductible Medical & Medicare Premiums
One of the biggest tax deductions for seniors in 2020 is the ability to deduct health insurance, Medicare and long-term care insurance premiums. In addition, prescription drugs and nursing home care are also deductible. To receive this tax break, you must itemize and file a Schedule A. Although only expenses in excess of 7.5% of your Adjusted Gross Income are deductible, if you are low income or have a large amount of medical expenses or both, this can result in substantial savings.
Top Tax Break for Seniors – Real Estate
Another tax benefit for seniors looking to downsize is on the sale of a home. According to the IRS, “as long as you live in your home for at least two out of the five years before you sell the profit that you make on the sale – up to $250,000 for singles and $500,000 for married couples – is not taxable.” In addition, many states, counties and other jurisdictions offer a break for seniors on property taxes.
Top Tax Break for Seniors – Tax Credit for Elderly & Disabled
If you are 65 or older and retired due to a disability, you are eligible to receive a $3750-$7500 tax credit. You must be permanently disabled, unable to perform work and forced to retire due to that disability. To qualify you also must:
- Be 65 or older on the last day of tax year 2020 (January 1, 2021) OR
- If under 65 on the last day of the tax year, you must be retired on permanent disability and receiving disability income. The disability income must come from an employer’s accident or health plan or a pension plan.
- Be a US Citizen
In addition, your income must be under the following limits, based on adjusted gross income:
- 17,500 or more and your filing status is single, head of household, or qualifying widow or widower
- $20,000 or more and you’re married but only one of you otherwise qualifies for the credit
- $25,000 or more and you file a joint married return
- $12,500 or more and you file a separate married return but you lived apart from your spouse all year
There are also limits to the non-taxable portions of your Social Security benefits, as well as to non-taxable portions of any pensions, annuities, or disability income you might have:
- $5,000 or more and your filing status if single, head of household or qualifying widow or widower
- $5,000 or more and you’re married but only one of you otherwise qualifies for the credit
- $7,500 or more and you file a joint married return and both of you qualify
Your income must meet both criteria.
Income Tax Exemptions for Seniors on Retirement Income
Is Social Security Income Tax Exempt?
The answer depends on your overall earnings and the source of that income. Add up half of your social security and all other income. If it is less than $25,000 if you file as a single, head of household or widow/widower or $32,000 if you are a married couples filing a joint return, your social security income is tax exempt. If your income is above those thresholds, up to 85% of your social security income may be taxable. If you are unsure, the IRS offers an interactive tool to help – IRS Tool.
Are Withdrawals From Retirement Plans Tax Exempt?
This depends on whether the retirement account is tax-deferred or tax-exempt. With a tax-deferred plan, the tax savings is on the contributions. With a tax-exempt plan, the tax savings is on the withdrawals. 401K and traditional individual retirement accounts (IRA’s) are tax-deferred while Roth 401K and Roth IRA withdrawals are tax-exempt.
Tax Benefits for Over 55 – Early Retirement Benefit
In general, you pay a 10% penalty on any retirement plan withdrawals before the age of 59 ½. However, the IRS has a “separation from service”, or early retirement, loophole that allows you to withdraw money from an employer’s 401(k), 403(b), or 501(a) plan at age 55 without penalty if you leave that company at age 55 or older. However, you pay taxes on the withdrawals as income unless you roll it over into a Roth account.
Do I Need To Pay Taxes After 72?
There is an old saying that two things are certain – death and taxes. Paying taxes has less to do with your age and more to do with the amount and nature of your income. However, taking advantage of the tax breaks and exemptions above will help you minimize what you owe the IRS.
While there are many tax breaks and deductions for seniors, which ones to take depends on your financial situation. If you have questions, reach out to a tax professional or www.irs.gov.