Getting older isn't all bad. For one thing, the IRS is kind enough to honor seniors with a few tax benefits that younger folks can't get. If you're old enough to claim these tax perks, then by all means, do so.
Bonus standard deduction
Taxpayers aged 65 and up who take the standard deduction rather than itemizing can add $1,250 to the standard deduction they'd normally get, based on their filing status. This bonus deduction is increased to $1,550 if the senior in question is unmarried and not a surviving spouse. If you're married filing jointly, and both you and your spouse are 65 or older, you both get to add the bonus to your standard deduction for a total bonus of $2,500. If blind, you get an additional $1,250 tacked on to your standard deduction.
Higher filing-requirement threshold
If you're 65 or older by the end of the tax year, the filing-requirement threshold is bumped up a bit, making it easier for you to avoid paying taxes at all. For 2016, the filing-requirement thresholds for taxpayers aged 65-plus are:
- $11,900 for single filers
- $14,900 for heads of household
- $17,900 for qualifying widow(er)s
- $21,950 for married couples filing joinly if one spouse is 65 or older
- $23,200 for married couples filing jointly if both spouses are 65 or older
If you're aged 50 or older by the end of the tax year, you're entitled to make catch-up contributions to your retirement accounts. The catch-up contributions are:
- $6,000 per year for 401(k) and 403(b) accounts
- $3,000 per year for SIMPLE plans
- $1,000 per year for traditional and Roth IRAs
Not only do these extra contributions help you to build up your retirement funds at the 11th hour, but they also give you an extra tax deduction for the year (except for Roth accounts, which are funded with after-tax money). Taxpayers aged 55-plus also get catch-up contributions to their HSAs to the tune of $1,000 a year.
Penalty-free retirement distributions
Starting the year you hit age 59-1/2, you can take money out of your retirement accounts without triggering the 10% early-distribution penalty. Note that you will still have to pay income taxes on the money you take out, with the exception of distributions from a Roth account.
Once you hit age 70-1/2, you're required to start taking distributions from all your retirement accounts except for the Roth varieties. What's more, if you leave your job in the year you turn 55 or later, you can start taking distributions from your 401(k) plan at that company immediately, without penalties. However, if you roll those funds into an IRA, you'll have to wait until age 59-1/2, as usual, before getting penalty-free distributions.
A tax credit just for you
Starting the year you turn 65, you may qualify for the Credit for the Elderly or Disabled. This credit is intended to help low-income seniors, so in order to qualify, your taxable income must not exceed:
- $17,500 if single, head of household, or qualified widow(er)
- $20,000 if married filing jointly and only one spouse qualifies
- $25,000 if married filing jointly and both spouses qualify
- $12,500 if married filing separately and you lived apart from your spouse for the whole tax year
On top of that, your nontaxable income must be under:
- $5,000 if single
- $5,000 if married filing jointly and only one spouse qualifies
- $7,500 if married filing jointly and both spouses qualify
- $3,750 if married filing separately and living apart
The base amount of the credit is $5,000, but you'll need to reduce this amount based on your income for the year. The IRS website has a publication that walks through the process of figuring out how much of the credit you're entitled to claim. Alternatively, you can attach Schedule R to your return, and the IRS will calculate the credit for you.
The IRS-sponsored Tax Counseling for the Elderly (TCE) program will assist taxpayers aged 60 and up free of charge. TCE volunteers specialize in tax areas of particular interest to seniors, such as pensions and claiming the senior tax perks mentioned above.
Many TCE volunteer sites are hosted by the AARP's Tax Aide program. The Volunteer Income Tax Assistance (VITA) program will provide tax advice and prepare returns for any taxpayer with an income of $54,000 or less, for free, although they don't necessarily have the training in senior-specific issues that TCE volunteers receive. The IRS provides a locator tool that you can use to find TCE and VITA sites in your vicinity.