Senior Americans get some special tax advantages, starting at 50 and escalating at 65. These tax benefits make it easier for seniors at all income levels. Some, like the property tax breaks, larger standard deduction, and catch-up contributions, make it easier for lower-income seniors to live on a fixed income or incentivize saving for retirement. Others, like qualified charitable contributions and the charitable contribution rule, are more of a “reward” for saving and investing earlier in life.
Larger standard deduction for seniors 65 and older
Seniors over 65 have an extra $1,750 for individuals and head of household, and $2,800 for married filing jointly in 2022 on their standard deduction. There is an extra standard deduction increase if the individual or at least one member of the couple is blind.
Higher income tax filing threshold
Because of the higher standard deduction, seniors over 65 are also allowed a higher income before they are required to file a tax return. The extra $1,700 of the deduction boosts the minimum income for a required return for individuals to $14,700, and $27,300 for married filing jointly in 2022. This applies only to taxable income. If the senior’s sole source of income is Social Security, he does not have to file. Persons who are not required to file an income tax return for income purposes may still wish to do so for other reasons, such as loss carryovers or refundable tax credits.
Reductions in property tax
Property taxes are, of course, not managed by the IRS, but many state and local taxation authorities recognize property tax reductions or exemptions for those who earn below a certain income, who are over 65, or both. If your income is less than 150% of the federal poverty line, or if you are over 65, this is worth looking into. For example, New York State grants local governments and school districts the option of reducing property taxes for seniors by reducing the tax assessment value of the seniors’ homes by as much as 50%. If the local government chooses to enact this, seniors who earn up to $29,000 may be eligible for the full amount of the reduction and smaller amounts of the reduction for incomes above $29,000.
Elderly and disabled credit
Elderly and/or disabled persons who are either over the age of 65, or who are under 65 but permanently and totally disabled and living on disability income. This disability income must be from an accident or pension plan, and your total taxable income must be less than $17,499 for individuals, $19,999 for married filing jointly where only one spouse qualifies, or $24,999 when both spouses qualify. The credit is valued at between $3,750 and $7,500.
Higher IRA contribution limit
Individuals over 50 who are still working are allowed a higher IRA contribution limit. Instead of being limited to $6,000 in tax-deductible contributions per year, those over 50 are allowed $7,000 in contributions for the year. A worker in the 24% tax bracket who saves the extra $1000 in a year would save an extra $240 in taxes. This helps make it easier for older Americans to reach a comfortable retirement income a bit more quickly. Low-income Americans may also qualify for a saver’s credit, which allows extra tax credit on contributions to an IRA.
“Catch-up” contributions for 401(k) accounts
Similar to the increased IRA contribution limit, workers over 50 are also allowed extra “catch-up” contributions to their work 401(k) plan. This catch-up contribution allows workers to contribute an extra $6,500 to their work 401(k) plan, bringing the total allowable contribution in 2022 to $27,000 for workers over 50. The extra $6,500 contribution would save an extra $1,560 for a worker in the 24% tax bracket.
No early withdrawal penalty
Once you reach the age of 59½, you can withdraw money without penalty from your retirement accounts. Before that age, people who attempt to take a withdrawal are subject to an extra 10% tax on the money withdrawn in addition to the income tax due on the money. After 59½, you can withdraw your money and pay only any income tax due on the money. If you leave a job a little earlier at 55, then you also are able to withdraw penalty-free the money from the 401(k) associated only with that job.
IRA distributions for charity
People over 70½ are required to take distributions from their IRA accounts. If you are privileged to not need the money from your retirement accounts to live, you are able to transfer up to $100,000 for a required distribution directly to an approved charity. This enables you to avoid paying taxes on your required distribution. The distribution doesn’t need to be large, however. If you can donate even $100 from your IRA to a charity, that money will be tax-free to you. If you are in the position to be able to do this, this can be a good way to take your required distribution without having to pay taxes on the money. Note that the money has to be transferred directly from the IRA to the charity by an IRA trustee. If you personally withdraw the money and then later try to donate it, the money will not be tax-free.
More generous HSA rules
Aging can also come with increasing health costs. In recognition of this, and in recognition of the fact that health savings accounts can provide valuable tax-free investment opportunities, the IRS allows seniors over 55 who have high-deductible health plans to contribute an extra $1,000 per year to their HSA accounts, for a total yearly contribution of $4,650 for individuals. Please note that you can no longer make HSA contributions if you are enrolled in Medicare.
Additionally, if you are over 65, you can withdraw money penalty-free from your HSA account. Prior to 65, there are fees for non-qualified (non-medical) withdrawals, but at 65, you are able to withdraw the money for any purpose without extra fees. If the money is used for non-medical purposes, it will be taxed as regular income, but without extra fees.
If you are over 50 or a senior citizen and need further clarification of the above listed tax advantages, feel free to contact Kislay Shah at kislay@shahcpaus.com or call at 646-328-1326.