Aging is not for sissies. I definitely can attest to that since, as the saying goes, I'm now a woman of a certain age.
But with age also comes wisdom (or so I've been promised!). And getting older also provides some tax benefits.
On this National Senior Citizens Day 2020 — yes, it was made official by President Ronald Regan in 1988 when he was 77-years-old — here's a look at seven federal tax breaks for older Americans.
The best news is that the Internal Revenue Service's definition of an older taxpayer is quite broad. The age range where these tax benefits kick in goes from 72 to 50, which looks younger to me every day!
1. Higher tax-filing threshold: Filing requirements take into account a person's age and income. When you're older, that means you get to make more than younger taxpayers before the Internal Revenue Service requires a Form 1040 filing. The amounts are adjusted for inflation. For the 2019 tax year, for example, single people age 65 and older could make up to $1,650 more than their younger taxpaying counterparts before they had to file. In dollar amounts, that's a $13,850 earnings threshold for senior taxpayers versus $12,200 for younger filers. The increases for older taxpayers are similar across all filing statuses. And married taxpayers take note. When you file a joint return, the added income level is bumped up for each of you once you celebrate your 65th birthdays.
2. Larger standard deduction: Most taxpayers already claim the standard deduction. That trend increased after the Tax Cuts and Jobs Act (TCJA) became law. It almost doubled the standard deduction for everyone. One thing that it didn't change was the existing larger deduction amount for filers who are age 65 or older. The added deduction amount is calculated per person, so a married couple filing a joint return gets an increased deduction accounting for both senior filers. For the 2019 tax year, aged or blind filers get an additional standard deduction amount of $1,300. Low inflation keeps it the same for 2020.
3. Medicare medical write-offs: Many older taxpayers, however, find it's still to their tax advantage to itemize, usually because they have a lot of tax-deductible medical expenses. If that's you, don't forget to count the Medicare Part B premium payments you make. They are considered a medical expense, as are the Medicare Part D prescription plan premiums you pay. That's because all these premiums are out of your own pocket. They could help your clear the 7.5 percent of adjusted gross income threshold you need to clear to claim your allowable medical expenses on Schedule A.
4. HSA contribution increase: To cover what seem to be ever-increasing medical costs, lots of folks of all ages opt for a high deductible health plan (HDHP). These plans usually have lower premiums, but as the name indicates, mean more out of pocket costs. To pay those, HDHP enrollees can open a tax-advantaged health savings account, or HSA. Owners of these savings accounts who are age 55 or older by the end of the tax year can contribute $1,000 more to their HSAs. Older HSA owners, however, need to note that they aren't allowed to contribute to the savings account once they enroll in Medicare.
5. Credit for the elderly or disabled: Older taxpayers who don't make much money, but still enough to require filing get a bit of help from the tax code. They could be eligible to claim a tax credit for seniors. Since it's a credit, it reduces dollar-for-dollar any tax you might owe. The credit amount, which is claimed by filing Schedule R, ranges between $3,750 and $7,500. As the credit's name indicates, it's also available for younger retirees who are disabled.
6. Additional retirement savings: More folks are working longer nowadays. Those extra career years not only help you cover your here-and-now expenses as you age, but they also can offer a way to stash more cash for when you finally decided to call it quits. Workers age 50 and older can contribute an additional $1,000 to an IRA, either traditional or Roth. If you have a workplace retirement plan, typically a 401(k), you also can make catch-up contributions to it once you turn. The IRA $1,000 catch-up contribution is not affected by the increased cost of living. However, added workplace plan contribution amounts for older workers are adjusted annually for inflation.
7. Special charitable donation: Retirees who've done a good job of saving eventually could be forced to take out some of that money before they need it. These required minimum distributions, or RMDs, now kick in at age 72. The Coronavirus Aid, Relief and Economic Security (CARES) Act waived the RMD requirement for 2020, but when it resumes next year, there's a way to avoid its tax cost. If you don't need your RMD to live on, you can avoid the tax due on the required withdrawal by choosing instead to make a qualified charitable distribution. Here you directly transfer up to $100,000 from your IRA to an IRS-qualified charity. The key here is the direct transfer, so work with your retirement account trustee and your chosen charity to ensure that the money goes to the good cause without a tax cost to you.
The inevitability of aging means that we'll all likely be able to enjoy at least some of these federal tax breaks. Whichever applicable tax birthday you celebrate, be sure to take advantage of the added gift from Uncle Sam.
You also might find these items of interest:
- IRS allows RMD reversal through Aug. 31
- Ways to work around the end of the stretch IRA
- How you can tap your retirement plan to cover COVID costs