[Last updated October 26, 2023]
Before you reach retirement age, consider how to prepare yourself financially. Familiarizing yourself with new tax deductions and credits for seniors can be beneficial. Here is everything you need to know about tax deductions and credits for seniors for the 2023 tax year.
What are tax deductions and credits?
Before you begin, you must understand what tax deductions and credits are. A tax deduction lowers your taxable income, reducing the amount you owe in taxes. A tax credit is money subtracted directly from what you owe.
Important senior tax deductions and credits
Knowing which deductions and credits apply to you as a senior is crucial to make the most of your money in retirement. Let’s break down the important deductions and credits for seniors.
Increased standard deduction and additional deduction for seniors
The standard deduction for the 2023 tax year has increased due to inflation. The new standard deduction for married couples who intend to file together is $27,700, a $1,800 increase from tax year 2022. The standard deduction for married couples filing separately or for single taxpayers is $13,850, an increase of $900 from 2022. Adults 65 and older are eligible to take an additional deduction of $1,500 (married) or $1,850 (single) on top of the new standard deduction for 2023. Note that the IRS considers you 65 the day before your 65th birthday.
Business and hobby deductions
When seniors retire from full-time jobs, many enjoy relaxing and living the good life. Others choose to embark on newfound adventures and hobbies. Many seniors work as consultants, freelancers, or contractors, and some even start their own businesses.
The line between business and hobby can be muddy. According to the IRS, the difference between the two lies in the fact that one is for fun and one makes you money. If you receive more than $600 for your goods or services — even if you use online marketplaces or payment apps — you may receive a Form 1099-K. All profits that you make are taxable. Although you are paying on your profit, you may be eligible for deductions and other write-offs related to your business, including but not limited to:
- •Home office deduction.
- •Heating and cooling expenses.
- •Phone and internet expenses.
- •Professional cleaning fees.
- •Home office equipment.
- •Stationery.
- •Depreciation of office furniture and technology.
Medical expense deductions
As you age, your medical expenses likely will increase. You can expect to pay more for your health and wellness, whether because of increased doctor visits or attending to more health issues. When you itemize the costs of your medical expenses, you can deduct them from your income taxes. The deductions are limited to 7.5% of your adjusted gross income (AGI).
You may be eligible for tax deductions from the following:
- •Mental health services.
- •Prescription costs.
- •Optometrist visits and glasses.
- •Home health care and aide services.
- •Health insurance premiums.
- •Dentures or additional dental services.
- •Medical travel expenses, such as parking fees and transportation costs.
Charitable contributions
If you give to charity, you might be eligible for a tax deduction. When you donate money or items to a qualified charitable organization, you may be allowed to deduct the amount donated or the property’s fair market value. If you donate a car or boat valued at over $500, note that your deduction is capped to the gross proceeds from the sale of your donation.
Charitable deductions apply only when you itemize. The best way to get the highest deduction is to make all your yearly contributions within the same year as opposed to once every year (for example, donating on January 1 and December 31 of the same year, essentially doubling your yearly contributions).
Social Security
Depending on the situation, some older adults may have the luxury of not filing for taxes at all. Once they turn 65, they have a different filing threshold. You do not need to file taxes if you’re over 65 and making less than $14,050 as a single filer or $27,400 as a married filer. If your main income is a pension or Social Security, you may not be required to file taxes, as earnings from Social Security are often exempt from federal income taxes.
You may not have to file taxes if your Social Security payments and other earnings are less than $25,000 annually. Individual filers with a total gross income, including Social Security, of over $25,000 and married couples filing jointly earning over $32,000 are taxed on up to 50% of their Social Security income. Individuals earning over $34,000 or couples earning over $44,000 will be taxed on up to 85% of their Social Security benefits.
Credit for the elderly or disabled
There is a tax credit for people over 65 and those under 65 with a permanent disability. Depending on filing status and income, it ranges from $3,750 to $7,500.
This tax credit equals 15% of the original amount owed in taxes, which is subtracted from what you owe.
You must meet multiple retirements to use this tax credit — and these specifications can change each year. To ensure you qualify for this tax credit, try using the IRS interactive tool or speak with an accountant.
Estate and gift tax
You can make an annual gift to any one person of up to $17,000 without incurring a gift tax. This amount may change in the coming years. Spouses can also “split” gifts, doubling the amount a married couple can gift annually. Regarding estates, you can leave up to $12.92 million to family or friends free of any federal estate tax.
Retirement plan contributions
The maximum retirement plan contribution will increase, allowing individuals to contribute up to $22,500 to their 401(k), 403(b), and the majority of 457 plans and up to $6,500 to IRAs.
When you contribute to a retirement account, you often can receive a saver’s credit, which lets you deduct a portion of your retirement contribution from the amount you owe the IRS in taxes. A nonrefundable saver’s credit helps to reduce the tax liability you owe, but you won’t receive a refund from the IRS for anything left over. The maximum AGI to be eligible for the saver’s credit — or retirement savings contribution credit — has increased to:
- •$73,000 for jointly filing married couples.
- •$54,750 for heads of household.
- •$36,500 for individuals or separately filing married couples.
Bottom line
Knowing your tax deductions and credits can greatly benefit you as a senior. You can receive many different tax deductions after the age of 65. If you are in retirement, you may receive even more benefits, tax deductions, tax exemptions, and tax credits. Each year, the rules change, and it is vital to stay on top of them to get the most rewards.
