"I am proud to be paying taxes in the United States. The only thing is -- I could be just as proud for half the money."
Few of us are eager to pay taxes, but they're the price for civilization. Still, there are lots of ways to legally shrink your tax bill or keep more money in your pocket, many of which relate to retirement. Here are seven facts about taxes that every retiree and soon-to-be-retiree should know.
Tax fact No. 1: Tax fraud hits the elderly hard
Older people can often be more trusting than others, and that can hurt them when they run across a con artist. Many, for example, are victims of tax scams, where they're called out of the blue by someone claiming to represent the IRS and saying that you need to make a payment immediately. Know that the IRS is not going to call and ask for your credit card numbers or Social Security number or bank account information or immediate payment over the phone. If you receive an alarming or threatening call, just hang up.
A similar scam occurs when you receive a phony email or end up at a phony website that looks legitimate -- perhaps purporting to be from your bank or a major retailer or other company you trust -- asking you for personal information. There are emails that look like they're from the IRS, requesting personal information from you, such as your credit card number, password, or perhaps your Social Security number. Be on your guard and don't offer personal information unless you're very sure whom you're giving it to.
Tax fact No. 2: Older taxpayers get a bigger standard deduction
There aren't many benefits to getting older, but a bigger standard deduction is one of them. When preparing your tax return each year, you get to choose between taking the standard deduction or itemizing your deductions if they total more than the standard deduction. Those aged 65 or older can use a higher standard deduction than the rest of us. For the 2017 tax year, the standard deduction is $6,350 for a single filer, $12,700 for those married and filing jointly, and $9,350 for heads of households. If you're 65 or older by the end of 2017, though, you can add an extra $1,250 to your standard deduction if you're married or $1,550 if you're unmarried.
Tax fact No. 3: A low income can get you a tax credit
If you're 65 or older by the end of the tax year, or you're retired on permanent and total disability with taxable disability income, you may be able to claim the hefty Credit for the Elderly or Disabled. It offers between $3,750 and $7,500 if your income is sufficiently low and you haven't received more than $5,000 in non-taxable Social Security or pension benefits if you're unmarried or more than $7,500 if you are married and filing jointly. What's sufficiently low? It's an adjusted gross income of less than $17,500 if you're single or $20,000 or $25,000 if you're married and filing jointly, depending on whether one or both spouses qualify. Ideally, you'll enjoy an income too great to qualify you for this generous credit, but if your means are modest, these thousands of dollars can really help.
Tax fact No. 4: There's a big tax break if you sell your house
Many people in or approaching retirement sell their homes and move. They may, for example, move to a retirement community, to a smaller home, or to a home closer to their children. There's a powerful tax break available for anyone selling a home if they lived in it for at least two out of the five years preceding the sale. The break lets you exclude up to $250,000 of the gain on the sale of your home from your taxable income -- and up to $500,000 of the gain if you're married and filing jointly. So imagine that you bought your home for $200,000 many years ago and you sell it for $500,000, netting a gain of $300,000. If you're single, the Home Sale Exclusion lets you avoid paying taxes on $250,000 of that gain and only count a gain of $50,000. If you're married, you can avoid taxes on the entire gain.
Tax fact No. 5: Your tax bill might be lower if you move
Speaking of selling your home and moving, you might consider moving to a region that's more tax-friendly, for retirees and others. For example, the best retirement states can include those that feature no state income tax, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividend and interest income -- but those can be significant for some retirees. It's not enough to just look for low or no income tax, though, because a state can offset the loss of income tax revenue with steep property taxes. Note that some states that do tax income make things a little better for retirees by exempting federal, military, and state pensions, along with Social Security benefits, from taxation. Those states recently included Alabama, Hawaii, Illinois, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. Alabama, Hawaii, and Illinois also exempt some private pension income. If you're thinking of moving, take some time to assess the tax environment in your potential new region.
Tax fact No. 6: Costly medical expenses can be deductible
One downside of getting older for many people is that health problems crop up -- and healthcare is a very costly expense for many retirees. Indeed, Fidelity Investments has estimated that a 65-year-old couple retiring today will spend, on average, a total of $275,000 out of pocket on healthcare during their retirement. Fortunately, tax deductions are allowed for qualifying medical expenses, though you can only deduct the portion of your qualifying medical expenses that exceed 10% of your adjusted gross income (AGI). So if your AGI is $60,000 and you have $6,000 or less in qualifying medical expenses, you'll get no tax relief. If you have $7,500 in qualifying medical expenses, you can take a $1,500 deduction. That 10% threshold used to be 7.5%, but beginning with the 2017 tax year, it's 10% for everyone.
Tax fact No. 7: The Social Security taxes you paid will pay off in retirement
Finally, there's Social Security. You spend your working life being taxed to support the program, and once you're in retirement, you can enjoy collecting benefits from it. According to the Social Security Administration, retirement benefits for those with average earnings will likely replace about 40% of your pre-retirement earnings. Those who had above-average earnings in their working years can expect a lower replacement rate, and vice versa. This makes it especially valuable to learn more about Social Security strategies such as when the best age would be for you to start collecting benefits.
Note, too, that your Social Security benefits can be taxed, too. Taxation happens if your income over a year features not only Social Security benefits but also significant sums from sources such as wages, self-employment income, interest, or dividend income. You will never be taxed on more than 85% of your Social Security benefits, and if the benefits make up all or vast majority of your income, you probably won't be taxed on them at all.
The aches and pains that come with growing older are certainly not welcome, but at least you can enjoy a few tax breaks that can shrink your tax bill.
The Motley Fool has a disclosure policy.