No one likes paying taxes, but for retirees on a fixed income, paying a lot of money to the IRS can be a financial disaster. Fortunately, there are several tax breaks that retirees can use to help cut their tax bill. By taking advantage of them, you might be able to put a big dent in what you have to pay and keep more of your hard-earned money for yourself.
1. Itemized deductions for medical expenses
As you grow older, your medical expenses tend to go up. Even though Medicare and similar programs pick up part of the bill, you can still find yourself on the hook for considerable out-of-pocket costs. That makes the deduction for incurred medical expenses essential for retirees.
In particular, this tax break allows you to claim a portion of your eligible medical expenses as an itemized deduction on your tax return. The portion that you're able to claim depends on your adjusted gross income.
If you're still preparing your 2016 tax return, the key figure for those 65 or older is 7.5% of adjusted gross income. Above that limit, you can claim an itemized deduction for extra medical expenses. For instance, if your AGI is $50,000 and you pay $10,000 in qualifying expenses, then you'll be able to take an itemized deduction for $6,250 -- the $10,000 you paid less $3,750, or 7.5% of $50,000. For 2017, that number has risen to 10%, although some tax advocates still hope that the lower 7.5% limit will get reinstated retroactively at some point in the future.
2. Higher standard deductions for seniors
If you don't itemize your deductions, the medical expense provision might not help you. However, non-itemizing taxpayers can benefit from a larger standard deduction for those who are 65 or older.
The amount of the increase depends on how you file your returns. If you're single or a head of household, then you can boost your standard deduction by $1,550. Married filers get a smaller increase of $1,250, but each spouse is potentially eligible for that tax break. Therefore, if both spouses are 65 or older, they'll get a total boost of $2,500 to their standard deduction.
If you turned 65 on or before Jan. 1, 2017, then you can claim the higher standard deduction on your 2016 tax return. Meanwhile, anyone who turns 65 this year will be able to use the deduction on the 2017 returns they file in early 2018.
3. Avoiding capital gains tax when you sell your home
If you're thinking about moving out of your family home, the prospect of capital gains taxes can be alarming. However, the provisions for having capital gains on a personal residence can save you a bundle in taxes. Specifically, single taxpayers can exclude up to $250,000 in gain on the sale of a home, with joint filers getting a $500,000 maximum tax benefit.
This provision is available to all homeowners, but it's especially important for retirees. If you've lived in your home for a long time, then price appreciation can add up. As long as you've lived in your home for at least two of the past five years, then the home-sale exemption for capital gains is available. That makes it important to look at selling your home before you make a move elsewhere. Otherwise, if you lose eligibility under the two-year rule, then you could end up with a tax bill that's tens of thousands of dollars higher than it absolutely needs to be.
If you're retired, it's critical to find tax breaks that will let you pay as little as possible to the IRS. Look closely at these provisions to see if they apply to you, and then take maximum advantage of their provisions to put yourself in a better position with your taxes.