Having a high-quality retirement can be tough, especially with the cost of many things going up each year. But Uncle Sam does extend a number of tax breaks exclusively to those in retirement (or at least old enough to retire). Taking advantage of them will help you keep more of your money each year, and could provide enough of a break to improve your quality of life in retirement.
Here's a look at three that are particularly appealing. If you qualify, don't miss out.
Higher standard deduction
If you don't need to or plan to itemize your deductions, those age 65 and over qualify for a higher standard deduction. The standard deduction increase is as follows:
- Single filers: $6,300 under 65; $7,850 65 and over.
- Married joint filers: $12,600 under 65; $13,850 65 and over.
- Head of household: $9,250 under 65; %10,800 65 and over.
For lower income seniors, or for those who have eliminated the most common itemized deductions such as mortgage interest, the larger standard deduction could be worth hundreds of dollars each year.
Lower threshold for deducting medical expenses
People under 65 can only deduct unreimbursed medical expenses if they exceed 10% of their adjusted gross income. However, people 65 and over are able to deduct medical expenses that exceed 7.5% of their adjusted gross income. These can include out-of-pocket payments for medical treatments, prescription medications, and even travel to and from medical treatment. Most dental expenses also qualify.
There are some important things to know, however. First, you must itemize your deductions, and depending on your situation, you may be better off claiming the standard deduction. Also, this exception to the 10% rule for those 65 and over is set to expire at the end of 2016, so keep that in mind as year-end approaches. If you have a medical procedure that's scheduled for 2017 that could be taken care of in 2016, the tax benefit could make it worthwhile to move it up, especially if Congress doesn't extend the exception.
Tax-free income with a Roth IRA
If you're not yet retired, this is one tax break that you might want to take full advantage of, since it will give you a source of completely tax-free income when you do retire. A Roth IRA allows you to set aside up to $5,500 per year ($6,500 if you're 50 or over), toward your retirement savings, with two big tax benefits.
The first benefit is that every dollar you put in your Roth can grow tax-free. In other words, things you might pay taxes on in a standard investment account -- such as dividends, or capital gains when you sell stock -- are not taxed inside a Roth IRA.
The second tax break is that when you do retire and begin taking distributions from your Roth IRA, those proceeds are not taxed. That differs from distributions from a traditional IRA or 401(k), which are treated as regular income and taxed as such.
An additional benefit of the Roth versus a traditional IRA or 401(k) is that there are no required minimum distributions. This could make a Roth the ideal long-term nest egg for late in retirement. Not only can you sit on the full amount until you choose to take distributions, but since they are tax free, every dollar in a Roth will go farther than the taxable distributions from your other retirement accounts.