Imagine enjoying your time dedicating to your favorite hobbies. This could be your daily life as a retiree. However, if you’re not well-prepared to handle taxes, you might see your fixed income diminish more than expected.
Fortunately, the federal tax code offers a series of breaks specifically designed to help retirees reduce their tax burden and increase their post-retirement income. Below, we present eight tax breaks you could take advantage of during your retirement.
Higher standard deduction for retirees
One of the main tax advantages for retirees is the possibility of opting for a higher standard deduction. While all taxpayers can take a standard deduction, it increases when you turn 65. For example, for the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for those filing jointly. Once you reach 65, this deduction increases by $1,950 if filing as single, leaving more money in your pocket.
Another important advantage for retirees is the elimination of early withdrawal penalties from retirement accounts, such as the 401(k) or IRA, starting at age 59½. Before this age, early withdrawals usually incur a 10% penalty, but once past it, this penalty disappears. This gives retirees greater financial flexibility. For example, if a retiree makes a $20,000 withdrawal from their retirement account, they will save the $2,000 corresponding to the 10% penalty.
Higher limit for health savings accounts (HSAs)
For those aged 55 and over, the contribution limit to health savings accounts (HSAs) increases by $1,000. These tax-advantaged accounts are intended to cover health-related expenses, and this increase allows retirees to set aside more funds for future medical expenses. Since healthcare costs tend to rise during retirement, this higher HSA limit represents a significant opportunity for retirees to save adequately.
For example, a retiree in the 24% tax bracket could save an extra $240 in taxes thanks to this increased HSA limit. This underscores the importance of saving for health, especially during retirement.
Higher threshold for tax filing requirement
The gross income threshold at which a person is required to file a tax return is higher for retirees. This means that retirees can have higher incomes before being required to file their returns. For example, in 2023, the threshold for those aged 65 and over was $14,700 for single filers and $28,700 for those filing jointly (if both are 65 or older). This higher threshold can help retirees avoid filing a tax return and save on tax preparation costs.
Catch-up contributions allow individuals aged 50 and over to contribute beyond the regular limits to their retirement accounts, facilitating additional savings. Maximizing these contributions under professional guidance can significantly increase retirement savings. For example, the catch-up contribution limit for the 401(k) is an additional $7,500 in 2024, which could translate into substantial portfolio growth over time.
Credit for the elderly or disabled
Some taxpayers aged 65 or older may be eligible for the credit for the elderly or disabled, a tax break that could reduce the amount of taxes by up to $7,500. To qualify, individuals without dependents must have a gross income below $17,500. If you are married and filing jointly with your spouse, both aged 65 or older, your gross income must be below $25,000.
Taxpayers making contributions to an IRA can benefit from an additional deduction. Depending on your filing status and adjusted gross income, the IRS may allow you to take a full deduction up to your contribution limit. For taxpayers aged 50 and over, this deduction can increase by an additional $1,000 due to the permitted catch-up contributions. This means that a retiree in the 22% tax bracket could save an extra $220 on their tax bill.
Qualified charitable distributions
Qualified charitable distributions are distributions from an IRA that are paid directly to a charitable organization. These distributions can be made tax-free, reducing a retiree’s taxable income. For example, a $5,000 distribution made by a retiree to a charitable organization could reduce their taxable income, saving up to $1,200 in taxes for someone in the 24% tax bracket.
Importance of personalized tax planning
To make the most of these tax breaks, it is essential to have a personalized tax planning strategy. Working with a financial advisor can help you identify the best opportunities to maximize your savings and reduce your tax burden during retirement. Every situation is unique, and a financial advisor can provide expert guidance to ensure you are making informed and strategic decisions.
In summary, retirees have a variety of tax breaks at their disposal that can help reduce their tax burden and increase their income. From the higher standard deduction and end of early withdrawal penalties to higher limits for HSAs and catch-up contributions, there are many opportunities to optimize your finances during retirement.
Make sure to take advantage of these benefits and consider working with a financial advisor to develop a tax planning strategy tailored to your specific needs. With proper planning, you can enjoy a more secure and financially stable retirement.
