As a retiree, there are several tax advantages that you may be eligible for, which can help reduce your tax burden and increase your retirement income. Depending on your situation, you may be able to take advantage of deductions, credits, and other tax strategies.
By using certain tax advantages, you may be able to save a considerable amount of money. Among retirees, the following tax advantages are most common.
#1 Tax-Free Income from Retirement Accounts
Once you reach 72, you must begin taking minimum distributions from your traditional individual retirement account (IRA) or 401(k). However, if you have a Roth IRA or a Roth 401(k) plan, you can withdraw tax-free income from these accounts as long as you meet certain criteria. In a Roth IRA, the money you contribute is after-tax, which means you’ve already paid taxes on it. Because of this, any withdrawals made after age 59½ are tax-free, including contributions and investment earnings. A Roth 401(k) is funded with after-tax dollars, but there is no income limit for contributions, unlike a Roth IRA.
#2 Social Security Benefits
Social Security benefits can be a valuable source of retirement income for many retirees. Federal income tax may apply to up to 85% of your Social Security benefits, depending on your income. However, some states do not tax Social Security benefits, while others only tax them if your income exceeds a certain threshold.
#3 Tax Credits for Retirees
Retirees may be eligible for several tax credits; in turn, this can reduce their overall tax bill. The most common tax credit for retirees is the Elderly or Disabled Credit, available to taxpayers 65 years of age or older or who have retired due to a disability. The credit amount varies based on income, filing status, and other factors. You may also be eligible for other tax credits, such as the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit. These credits can help reduce your overall tax liability and increase your retirement income.
#4 Deductions for Medical Expenses
Retirees with high medical expenses may be able to deduct some of these costs on their tax returns. To qualify for the medical expense deduction, your expenses must exceed 7.5% of your adjusted gross income (AGI). This deduction can be especially valuable for retirees with high healthcare or long-term care expenses.
#5 Charitable Contributions
Retirees who make charitable contributions can receive a tax deduction for their donations. If you itemize your deductions on your income tax return, you will be able to claim this deduction. If you are a retiree who regularly donates to charities, you may be able to reduce your tax burden while supporting important causes.
#6 Property Tax Relief
Many states offer property tax relief programs for seniors, which can help reduce the property tax that retirees must pay each year. These programs may include exemptions or deferrals for property taxes, depending on the retiree’s income, age, or other factors.
#7 Estate Tax Exemptions
Retirees with significant assets may be concerned about estate taxes, which are levied on the transfer of assets after someone passes away. However, the federal estate tax exemption is currently $11.7 million per person, meaning that most retirees will not need to pay any estate taxes. Some states also have their own estate or inheritance taxes, but these taxes often have higher exemptions than the federal estate tax.
In conclusion, several tax advantages are available to retirees, including tax-free income from retirement accounts, Social Security benefits, tax credits, deductions for medical expenses, charitable contributions, property tax relief, and estate tax exemptions. By taking advantage of these tax benefits, retirees can help reduce their overall tax burden and increase their retirement income. It’s important to consult with a tax professional or financial advisor to determine which tax advantages are available and how to best utilize them to achieve your retirement goals.