If you are recently retired, there may be new tax break opportunities for you to take advantage of. This is doubly important if you are on a fixed income.
Oftentimes, seniors miss valuable tax-saving opportunities, not through foolishness but simply because they just don’t know about them.
If this sounds like you, it is simply a mistake that you can’t let go on any longer.
The most popular tax break for seniors is the standard deduction.
When you turn 65, the IRS offers you a gift in the form of a larger standard deduction. As an example, a single 64-year-old taxpayer could have claimed a standard deduction of $12,550 on his or her 2021 tax return.
A single 65-year-old taxpayer, however, would have received a $14,250 standard deduction.
The extra $1,700 is an incentive to take the standard deduction rather than itemize.
Couples in which one or both spouses are age 65 or older can also claim a bigger standard deduction. If only one spouse is 65 or older, the extra amount for 2021 would have been $1,350. If both spouses were 65 or older, you are eligible for a $2,700 deduction.
Medical and low-income
When should you itemize anyway? Some seniors have rising medical expenses. If you itemize, you may be able to deduct unreimbursed medical expenses.
However, that is only if the amount exceeds 7.5% of your adjusted gross income (AGI). As an example, if your adjusted gross income is $40,000, the threshold is $3,000.
In simple English, this means if you have $10,000 in unreimbursed medical bills, you might be able to deduct $7,000 of it from your taxes in retirement.
While many seniors are aware that they have medical expenses, it’s easy to miss the special tax credit for low-income elderly, or disabled, people.
This is because this tax credit isn’t mentioned at all on Form 1040, the main tax form. On the 1040 form instructions, it is only quickly referenced once.
But now that you know about it, there is no excuse to be ignorant of it.
To be eligible for the credit, you must be a “qualified individual” and pass two income tests.
A “qualified individual” in this case is if you were age 65 or older, or you were under age 65, you retired on permanent and total disability, and you received taxable disability income.
Now to the income tests. The first income test is based on your adjusted gross income (AGI).
If you file your tax return using the single, head-of-household or qualifying widow(er) filing status, your AGI must be less than $17,500.
If you’re married and file a joint return, but only one spouse qualifies for the credit, your AGI can’t exceed $20,000.
Married couples filing jointly must have an AGI below $25,000 if both spouses qualify.
The second income test is based on the combined total of your non-taxable Social Security, pension, annuity, and disability income.
For single, head-of-household, and qualifying widow(er) taxpayers, the combined income must be less than $5,000. This same income limit also applies to joint filers if only one spouse qualifies for the credit.
If both spouses on a joint return qualify for the credit, the income limit is $7,500.
If you determine that you’re eligible for the credit, then you may be able to trim up to $750 off your tax bill if you’re single, or up to $1,125 if you’re married.