No one likes to pay taxes, but for retirees, every dollar that goes to the IRS is one less dollar they have to make ends meet. Fortunately, the tax laws include several breaks that older taxpayers can take advantage of to reduce their tax bills, including some that are tailor-made for those in their golden years. As the tax season enters its final month, let's take a closer look at four of the top tax breaks that retirees can use to pay less to the IRS.
1. Bigger standard deductions for older Americans
Many taxpayers take the standard deduction on their returns, and those who are 65 or older by the end of 2014 get an additional boost to their standard deduction that younger investors don't get. For 2014, the increase is $1,550 for single filers and $1,200 each for married filers. The same increase is available to blind taxpayers regardless of age, and those who are 65 and blind are allowed to claim double the increase in the standard deduction.
2. Medical expenses
Medical expense deductions aren't limited just to retirees, but few taxpayers take them because of the high thresholds these expenses have to reach before you can actually take a deduction. For most taxpayers, you can only deduct the portion of medical expenses that exceeds 10% of your adjusted gross income, and because they're an itemized deduction, they only produce a tax benefit if your total itemized deductions exceed the standard deduction.
Those who are aged 65 or older are more likely to be able to deduct medical expenses for several reasons. First, the expense threshold is lower for older Americans, at just 7.5% of adjusted gross income. Further, our healthcare needs tend to increase as we age, and even with Medicare coverage, out-of-pocket costs can still add up. But most importantly, because most retirees have far lower income than they did when they were working, the income limitation is less restricting for most retirees. In general, most medical and dental expenses are eligible for the deduction, including Medicare and health insurance premiums, drug costs, and other expenses you pay yourself.
3. Exemption from gains on the sale of your home
Many retirees choose to downsize their housing, selling a family home that they may have owned for decades. For them, the tax break on capital gains on the sale of a primary residence plays a key role. Single taxpayers can exclude up to $250,000 in gains on a home sale, while joint filers enjoy an even bigger exclusion of $500,000.
In order to treat your home as a qualifying primary residence, you must have lived in it for at least two of the five years before the sale. Therefore if you're considering moving to a new home or an assisted living facility, it's critical that you time your decisions so as not to lose the benefit of the exemption, as it can save you tens of thousands of dollars in tax.
4. Low rates on investment income
Many retirees can take advantage of the low tax rates on dividends and long-term capital gains to cut their tax bills. For those in the bottom two tax brackets -- which allow single filers to earn up to $36,900 in taxable income and joint filers to earn up to $73,800 -- any qualifying dividend income and long-term capital-gain income has a 0% tax rate. Even for those in higher brackets, a 15% maximum rate applies to all but the top bracket; a 20% maximum applies to singles with taxable income of $400,000 or more and joint filers earning $450,000 and up.
Even a small tax bill can be a financial burden for cash-strapped retirees trying to live on a fixed income. Any tax break you can get, though, means a better chance of being able to cover your ordinary expenses and, hopefully, having a little left over.