Uncovering Overlooked Tax Breaks for Retirees and Individuals Over 65
A TYS Accounting Guide
Welcome to retirement—a time for you to reap the rewards of a lifetime of hard work. At TYS, we understand that transitioning to a fixed income requires careful financial planning, and a significant, yet often underestimated, part of that plan is strategic tax management.
Many retirees and individuals over 65 miss out on substantial tax savings simply because they are unaware of the deductions and credits available specifically to them. As your trusted financial advisors, we’ve compiled this guide to shine a light on some of the most frequently overlooked tax breaks. Understanding these opportunities can help you keep more of your hard-earned money and enhance your financial well-being throughout your retirement years.
Take Advantage of the Higher Standard Deduction
This is one of the most straightforward tax benefits for seniors, yet it’s surprising how many people are unaware of the specifics. If you or your spouse are age 65 or older by the end of the tax year and you do not itemize your deductions, you are entitled to a higher standard deduction.
- How it Works: The IRS provides an additional standard deduction amount that you add to your base standard deduction. For the 2024 tax year, this additional amount is $1,950 for a single individual or head of household. If you are married and filing jointly, the additional amount is $1,550 for each spouse who is 65 or older.
- Expert Insight: This is a simple but powerful benefit. For a married couple where both spouses are over 65, your standard deduction increases by $3,100. This directly reduces your taxable income, potentially lowering your tax bill or even placing you in a lower tax bracket.
The Power of Itemizing Medical Expenses to Maximizing Your Retirement Income
While the threshold for deducting medical expenses can be high, it becomes much more attainable in retirement. With potentially higher healthcare costs and lower Adjusted Gross Income (AGI), this deduction can become a significant tax-saver.
- How it Works: You can deduct the portion of your medical expenses that exceeds 7.5% of your AGI. The list of qualifying expenses is extensive and often underestimated. It includes:
- Premiums for Medicare Part B, Part D, and Medicare Advantage plans.
- Premiums for qualified long-term care insurance (subject to age-based limits).
- Out-of-pocket costs for prescriptions, dental care (including dentures), vision care (glasses, contacts), and hearing aids.
- Transportation costs to and from medical appointments (at a standard mileage rate set by the IRS).
Expert Insight: Meticulous record-keeping is key. Many retirees fail to track all their qualifying expenses throughout the year. We advise our clients to keep a dedicated folder for all medical receipts and premium statements. The cumulative total of these small expenses can easily surpass the 7.5% threshold.
A Smarter Way to Give: Qualified Charitable Distributions (QCDs)
For charitably inclined retirees with traditional IRAs, the QCD is a superior way to give. It is arguably one of the most effective and underutilized tax strategies available.
- How it Works: If you are age 70½ or older, you can directly transfer up to $105,000 (for 2024) from your IRA to an eligible charity. This amount can count towards your Required Minimum Distribution (RMD) for the year but is excluded from your taxable income.
Expert Insight: This is a win-win. By excluding the distribution from your income, you lower your AGI. This can help you avoid or reduce the taxation of your Social Security benefits, minimize the impact of the medical expense AGI threshold, and potentially lower your Medicare premiums. For those who wouldn’t otherwise itemize, this provides a tax benefit for their charitable giving that they would have lost.
Strategically Manage Your Social Security Taxability to Maximizing Your Retirement Income
A surprise tax bill on Social Security benefits can be a shock to new retirees. Whether your benefits are taxed depends on your “provisional income,” and you have some control over this.
- How it Works: Your provisional income is calculated as: Your Adjusted Gross Income + Nontaxable Interest + 50% of Your Social Security Benefits If this total exceeds certain thresholds ($32,000 for married filing jointly, $25,000 for single filers), a portion of your benefits (up to 85%) becomes taxable.
- Expert Insight: The key is to manage the other components of your provisional income. By strategically timing withdrawals from retirement accounts, considering Roth conversions before you start receiving benefits, and utilizing strategies like QCDs, you can keep your provisional income below the taxation thresholds and protect more of your Social Security income.
Don’t Overlook the Credit for the Elderly or Disabled
This is a less common credit due to restrictive income limits, but for those who qualify, it provides a direct, dollar-for-dollar reduction of their tax liability.
- How it Works: This credit is available to individuals who are either age 65 or older, or who are under 65 and retired on permanent and total disability. The income limitations are quite strict. For example, for a single individual, their AGI must be less than $17,500.
- Expert Insight: While the income cap prevents many from qualifying, it is crucial to check your eligibility if you have a low-income year. Life events can unexpectedly change your financial picture, and it’s important not to assume you won’t qualify without checking the rules for that specific tax year.
Investigate State and Local Tax Relief
Beyond federal taxes, your state and local governments often provide significant tax relief for seniors, most commonly in the form of property tax breaks.
- How it Works: These programs vary widely by state and municipality. They may come in the form of a property tax “freeze,” an exemption, or a direct credit. They are almost always based on age and income.
- Expert Insight: These benefits are not automatic. You must apply for them through your local tax assessor’s office. We strongly encourage all our senior clients to visit their state’s Department of Revenue or Taxation website and their local town or county’s website to search for “senior property tax relief” or “homestead exemption for seniors.”
Planning is Paramount
Navigating the tax landscape in retirement can be complex, but you don’t have to do it alone. The strategies outlined above are a starting point, and the best approach will always depend on your unique financial situation.
At TYS, our goal is to help you build a tax-efficient retirement plan that lets you focus on what truly matters. Contact us today to schedule a comprehensive review of your tax situation and ensure you are taking advantage of every opportunity to save.