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Tax Deductions and Benefits for Older Adults
Considering the various subcategories of expenses and relevant tax regulations, filing taxes can be immensely stressful and confusing. Keeping in mind the digitalization of most filing procedures and platforms, which may make it more difficult for older adults to figure out how their age and social status affect their tax requirements, we’ve listed some tax deductions and benefits applicable to individuals aged 65 and older.
The following is a short explanation of the taxes and relevant deductions that will be covered in this article:
Standard Deduction — For every average individual who doesn’t own small businesses, donate large amounts of money for philanthropic purposes, or undergo complex business transactions, this refers to the amount of your income that is not taxable. This base amount is influenced by your filing status and adjusted each year by taking into account the inflation rate. Depending on your filing status, you may not be eligible for standard deduction, or you may qualify for additional deductions on top of the standard deduction.
Social Security — One of the two taxes that all employees have to pay, the federal government collects Social Security tax and uses it to fund the Social Security program, which pays for retirement, disability, and survivorship benefits. Depending on your filing status and amount of benefit you receive, your benefits may also be taxable.
Medical and Dental Expenses — The IRS allows you to deduct a certain percentage of medical expenses not covered by your medical insurance from being taxed. Depending on your filing status, you may be eligible for extra tax credits or deductions.
Property Tax — This is calculated based on the assessed value of a property and paid to the local/state government by the property owner. However, some may be eligible for property tax deductions based on the conditions of their property transactions, filing status, or the amount of years they’ve occupied their real estate.
Charitable Deduction — If you donate to public charities, your charitable contributions will allow you to reduce your taxable income. Usually individuals who itemize their taxes are eligible for these deductions.
Standard Deduction
While the standard deduction depends on your filing status and changes every year, it increases for individuals over 65 years of age. If your filing status is single, you get a tax deduction of $14,250 for the 2021 tax year. If you and your partner are both 65 or older and your filing status is married, you get a tax deduction of $27,800. If your partner has passed away, you get a tax deduction of $26,450.
Social Security
Social security income includes monthly retirement payments and benefits issued to survivors and those with disabilities. The base amount for those filing as single, widow(er), or married filing separately and having lived apart from their partner for the entire year is $25,000, and the base amount for those married filing jointly is $32,000.
However, your benefits may become taxable if the total of 50 percent of your social security benefits and all other sources of income, including tax-exempt interest, is greater than the base amount for your filing status. If you are filing as single and your earnings (Social Security and other sources of income) add up to between $25,000 and $34,000, or if you and your married partner’s earnings (Social Security and other sources of income) add up to between $32,000 and $44,000, you will have to pay income tax on up to 50 percent of your benefits. For those whose earnings exceed the amounts indicated above, you will have to pay income tax on up to 85 percent of your social security benefits.
This does not include Supplemental Security Income (SSI) payments, a program that provides adults aged 65 or older—as well as individuals with disabilities, limited income, and limited resources—monthly payments that are to cover basic needs such as food, clothing, and shelter. These earnings are usually exempt from federal income taxes.
Medical and Dental Expenses
Seniors have the option to itemize and deduct any medical and dental expenses exceeding 7.5 percent of your adjusted gross income you paid for yourself, your partner, and your dependents.
Some common deductible items are listed below, while more specific rules are listed here.
Doctor or dentist appointment fees
Prescription drug costs
Mental health expenses, such as costs for therapy
Costs for glasses, dentures, or orthodontic appliances
Relevant expenses necessary due to medical needs, for example parking fees
Health insurance premiums
Senior care costs
If you are aged 65 or older, or retired on permanent and total disability and have received taxable disability income for the specific tax year, and your adjusted gross income or nontaxable Social Security is within a specific amount, you are eligible for a tax credit ranging between $3,750 and $7,500.
Real Estate / Property Deduction
Older adults and/or retired individuals often need to sell their houses and move due to changes in their living habits and needs. Depending on your reason for selling the house and how long you have been living in the house (usually in units of years) before selling, a certain percentage of your profit from the sale won’t be taxable, and there’s a chance your profit won’t be taxed at all! Here is a guide on how capital gains tax works and what that means for your real estate sales.
Charitable Deduction
A great number of individuals choose to make charitable donations to their community and society following retirement. Regarding cash contributions, the amount an individual can deduct is limited to at most 60 percent of their adjusted gross income. If the contribution is a qualified contribution, individuals may deduct up to 100 percent of their adjusted gross income, and contributions that exceed that amount may carry over to the next tax year. If the contribution consists of property other than cash, the deductible amount is usually limited to the property’s market value, not the price at which it was originally bought.
It is also important to keep in mind different tax regulations in different states. Check out this guide for more detailed information on tax rates and rules that may impact older adults. For the full guide on tax rules for seniors, check out the Tax Guide for Seniors published by the Internal Revenue Service (IRS).
