Though your income might decline after you’ve retired, that doesn’t mean the Internal Revenue Service stops collecting taxes in retirement, so it’s important you take any tax breaks for retirees you can. There’s no universal version of a retiree, so you must check each of the breaks to determine if you qualify. You can take advantage of several tax deductions and tax credits to lower your taxes. Read on for alist of tax deductionsfor those in retirement.
7 Lesser-Known Tax Breaks for Retirees
To ensure you’re not paying more taxes than you need to, learn about some of the tax breaks that apply to retirees that you might otherwise overlook. Here are tax breaks for the retired:
1. Dental and Medical Expenses
Typically, you’re only allowed to deduct the portion of your dental and medical expenses that exceed 10 percent of your adjusted gross income. However, if you or your spouse are 65 or older, the deduction gets a little sweeter: your threshold drops to 7.5 percent of your AGI. For example, if your AGI is $40,000, you can deduct medical expenses in excess of $3,000.
Medical expenses include a wide range of medical costs, from paying for visits to doctors and dentists, to care at a nursing home, to prescription drugs. Similar, you can also deduct costs of false teeth and glasses or contact lenses. Plus, when you have to travel to the doctor, whether it’s driving across town or taking a trip for specialized treatment, you can deduct the costs of travel.
You might not need nearly as large a home in retirement as you did previously, so you could be looking at substantial capital gains when you sell your home if you’ve been living in it for a long time. You can exclude the first $250,000 of gain from taxes — or the first $500,000 if you’re married filing jointly — if you meet the qualifications. To qualify, you must have used the home as your primary residence for at least two of the past five years and you must have owned the home for at least two of the last five years.
For example, say you and your spouse bought your home 20 years ago for $200,000. Though it’s been fantastic for raising your kids, they’re all out of school now, and you sell it for $750,000 so that you can downsize. Typically, you would have a $550,000 taxable capital gain. Because you’ve owned the home and used it as your primary residence for at least two of the last five years, you get to exclude $500,000 of gain on your joint return, so you only pay taxes on $50,000 of capital gains.
RELATED: Check out some of the top states for retirees:
Top 10 cities where retirees are moving
Top 10 cities where retirees are moving
10. North Las Vegas, Nevada
North Las Vegas is a newcomer to our top 10. One appeal for retirees living in North Las Vegas is how tax-friendly Nevada is for retirees. Social Security income and withdrawals from retirement accounts are not taxed. And if you plan on earning during retirement, the marginal state tax rate in Nevada is 0. Unfortunately, if you are a retiree in North Las Vegas who wins it big on the slot machine there will be some taxes to pay. The city also has great weather thanks to being in a desert.
Net migration: 929
(Mitchell Funk via Getty Images)
9. Cape Coral, Florida
Waterfront Wonderland is once again a popular destination for retirees. Last year Cape Coral ranked second while this year it ranked ninth. In total Cape Coral gained 949 retirees, with 1,926 immigrating and 977 emigrating.
Cape Coral was also the second-biggest beneficiary of Florida’s growth in retirees. What is interesting is that while a large chunk of Arizona retirees went to the Phoenix metro area, retirees coming to Florida tended to be more dispersed. Overall Florida had the largest gain in retirees but had only two cities crack our top 10.
Net migration: 949
(Joe Raedle via Getty Images)
8. Gilbert, Arizona
Gilbert is the final Arizona city to crack our top 10. Like Chandler this city is great for golfers. According to Census Bureau data, there are around 150 golf courses in the area. Retirees can also appreciate how safe Gilbert is. FBI data shows there are only 1,320 property crimes per 100,000 residents.
For the retirees looking to escape the cold, especially those coming from the Northeast, Gilbert is a great option. There are only 16 rainy days per year and the average daily high temperature is 87.
Net migration: 1,002
(jrmetcalf via Getty Images)
7. Peoria, Arizona
Peoria is a large suburb to the north of Phoenix. This city saw an increase of 1,310 retirees, with 1,839 arriving and 529 leaving. Peoria has seen stunning population growth in the recent past. In 1980 the population was only 12,171, while in 2016 it was 164,172.
For seniors who love baseball Peoria may be a good spot to settle. The Peoria sports complex is the spring training home of both the San Diego Padres and the Seattle Mariners.
Net migration: 1,310
(Greg Thomsen via Getty Images)
6. Overland Park, Kansas
Overland Park saw a net increase of 1,330 retirees. Kansas as a state only saw a net increase of 1,357, meaning that for retirees Overland Park was the star destination. Overland Park is a great bargain for retirees. Housing is relatively affordable, costing only $123.50 per square foot, according to Zillow data. In fact, according to our projections Overland Park is one of the most undervalued cities in America.
Net migration: 1,330
(Bloomberg via Getty Images)
5. Chandler, Arizona
Retirees are coming to Chandler in droves. Census Bureau data shows that 1,718 retirees immigrated to Chandler while only 260 emigrated. One reason they may be coming is the golf. Chandler is one of the best cities in the country for golf, thanks to its hot, sunny weather and abundant golf courses. Of course, the low cost of living and tax benefits Arizona provides probably doesn’t hurt.
Net migration: 1,458
(Richard Cummins via Getty Images)
4. Phoenix, Arizona
Phoenix is the second of five Arizona cities in the Phoenix metropolitan statistical area to crack our top 10. The Valley of the Sun, as far as big cities go, is relatively affordable, especially when it comes to paying for housing. According to data from the Census Bureau, the median monthly housing cost is only $993.
Phoenix actually saw some of the most churn when it came to retirees coming and going. Just over 4,100 retirees left the city while over 5,600 arrived. For both those metrics Phoenix ranked first in the top 10. In fact only Chicago and New York had more retirees emigrate than Phoenix.
Net migration: 1,470
(Davel5957 via Getty Images)
3. New Orleans, Louisiana
New Orleans is something of a surprise inclusion in this year’s top 10 since it did not even crack the top 25 in last year’s study. But it’s not too hard to see the appeal. New Orleans is a warm city on the coast with plenty of cultural activities to enjoy. Another factor attracting retirees may be the famous food scene in New Orleans. Overall the Big Easy saw an increase of 1,520 retirees coming into the area.
Net migration: 1,520
(picturist via Getty Images)
2. Jacksonville, Florida
Jacksonville is the largest city in Florida and saw a large influx of retirees moving into the city. Overall 1,817 emigrated while 3,761 immigrated, leaving the city for a net gain of 1,944.
One major reason why retirees love Jacksonville, and Florida in general, is how tax-friendly it is. In past studies we found that Jacksonville is the third-lowest taxed city in the country. It is also a good option for retirees who still want to live in the big city but keep costs low. We estimate that the average Jacksonville retiree would need about $62,470 in annual retirement income to live comfortably. That figure is much lower than other big cities.
Net migration: 1,944
(MichaelWarrenPix via Getty Images)
1. Mesa, Arizona
Mesa is a city in the Phoenix metropolitan area. Last year, Mesa led all cities with a net gain of 2,565 seniors. In this year’s study Mesa also ranked first with just over 3,400 more seniors immigrating to Mesa than emigrating. Mesa is attractive to seniors because of its weather. The sun is almost always out and even in the dead of winter, it never gets that cold. The average low in December, for example, is only 40 degrees.
Net migration: 3,442
(Terryfic3D via Getty Images)
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3. Property Tax Breaks
You’ll still be responsible for paying state taxes if you still own property, whether it’s the same house or you’ve downsized. But many states offer tax reductions for older taxpayers, though the age varies by state.
For example, in New York, if you’re over 65 years old and your income falls below the income limits, your tax assessment on your home can be reduced by 50 percent. In Washington, however, you qualify for a property tax exemption at age 61, though you must still meet income limits.
4. Contributions to Traditional IRAs
You can stillmake an IRA contribution to a traditional IRA to reduce your taxes if you won’t turn 70.5 years old this year. You must have earned income equal to or greater than your contribution, so if you’re still working part-time or keeping your business going, you can defer the taxes until you take the money out in your traditional IRA at a later date. The deduction for a traditional IRA won’t reduce your Social Security tax, and the Social Security tax rate, like the Medicare tax rate, doesn’t change after you’ve retired.
5. Charitable Contributions From Required Minimum Distributions
When you hit age 70.5, the IRS requires that you start taking required minimum distributions from your retirement savings in qualified plans like IRAs and 401ks. However, you can direct your IRA custodian to distribute up to $100,000 of your retirement distribution directly to charity. The contribution counts toward the minimum amount you have to withdraw but isn’t included in your taxable income.
One advantage to making the charitable contribution directly from your IRA is that the amount is excluded from your taxable income. If you don’t have enough itemized deductions to justify forgoing the standard deduction, you can’t deduct charitable contributions. Second, the amount of the contribution isn’t included in your adjusted gross income, which could mean a smaller portion of your Social Security benefits will be taxable.
6. Credit for the Elderly or Disabled
The Credit for the Elderly or Disabled is available for people age 65 and older or who are totally and permanently disabled who meet the income requirements. The income and nontaxable benefit limits are as follows:
Singles: $17,500 of income and $5,000 of nontaxable benefits
Married filing jointly (one spouse eligible): $20,000 of income and $5,000 of nontaxable benefits
Married filing jointly (both spouses eligible): $25,000 of income and $7,500 of nontaxable benefits
Married filing separately: $12,500 of income and $3,750 of nontaxable benefits
As long as you qualify, you can allow the IRS to figure the tax credits for you by attaching Schedule R, checking the box in Part I, and completing Part II and lines 11, 13a, and 13b of Part III. To claim the credit, you must useForm 1040orForm 1040A.
When all else fails, you can take solace in the fact that your standard deduction goes up just because you’re getting older. If you are 65 or older or are blind, your standard deduction increases by $1,550 if you are single or head of household or $1,250 if you are married.
If you earn money selling your words to websites and other publishers, the Internal Revenue Service will likely say you’re a small business owner. Freelance income is self-employment income, and so are any royalties you receive for that book you published or self-published. That can be a good thing, because the self-employed are privy to some tax perks that employees don’t usually receive.
The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.