How much tax exemption is there for senior citizens?

While retirement may mean the end of your 9 to 5 workday, it doesn’t mean that the ‘tax man’ will forget about you! Fortunately, there are various tax exemptions and benefits that seniors can take advantage of to ease their burden in retirement. Here are some of the tax exemptions to be aware of.

Once you reach age 65, you will be eligible for increased standard deductions. For 2024, senior filing as single taxpayers get $1,950 more than people below age 65, while married couples filing jointly get $3,100 more than people below age 65. Additionally, Social Security benefits are often exempt from federal income taxes, while most states exempt or partially tax these benefits.

Standard Deduction Increases

If you have been an active taxpayer during your working years, you are probably already familiar with the standard deductions you can use on your tax return. Once you turn 65, you will be able to claim a new, additional standard deduction on top of the regular deductions.

For 2024, the standard deduction for seniors filing individually is $1,950 higher than the deduction for people below age 65. Married couples filing jointly can increase the standard deduction by $1,550 if one spouse is 65 or older, and $3,100 if both couples are age 65 or older. This will help boost your tax relief and keep more of your hard-earned money in your pocket.

Social Security and Tax

For many seniors, Social Security is one of (if not the) primary source of income in retirement. If you file as an individual, and your annual earnings (including Social Security) are less than $25,000 per year, you will be exempt from federal income taxes. However, if your earnings are more than $25,000 but below $32,000, up to 50% of your benefits will be taxed.

Married couples filing jointly with incomes below $32,000 are fully exempt from federal income taxes. However, earnings above $32,000 but below $44,000 are subject to federal income taxes, but up to 50% of the benefits.

Tax credits for seniors

The IRS also offers a special tax credit specifically designed for elderly and disabled taxpayers. You will be eligible for this program based on your age, disabilities you have, and set income thresholds per state. Generally, you (or your spouse) must be age 65 or older, and have a low income.

To qualify for the tax credit, you must pass two income tests. First, for 2024, your annual gross income must be below $17,500 ($25,000 for married couples filing jointly). If you are married and file jointly, but only one spouse qualifies for the credit, the AGI must be below $20,000. If you are married but file separately, and lived apart from the spouse for the entire year, the AGI must be below $12,000.

The second income test is based on the combined income of your non-taxable Social Security, pension income, annuities, and disability income. For single filers, the combined income must be below $5,000, or $7,500 for married couples. For married couples filing separately, and living apart from their spouse for the entire year, the income must be below $3,750.

Property tax exemption

While the specifics of what is on offer to you will again be highly dependent on the state in which you live, most US states offer property tax exemptions or credits for senior citizens who own their homes. Eligibility criteria vary by state and locality but typically include age and income thresholds.

Charity donations

Retirees are required to take mandatory withdrawals from their traditional retirement accounts like IRAs starting from age 73. If you don't need the money now, you can avoid income taxes by making a qualified charitable distribution. Once you reach age 70 ½ or older, you can transfer up to $100,000 each year from your traditional IRA to a qualified charity and you won't owe any income taxes on the transaction. If you are married, your spouse can transfer an additional $100,000 from their IRA to a qualified charity tax-free. The charity transfers will count towards your required minimum distributions.

State income tax exemptions

Many states offer various tax exemptions on retirement incomes, but the tax rules may vary. Some states exempt Social Security benefits from state income taxes, while other states don't have income taxes. Examples of states that fully exempt Social Security income from state income taxes include Alaska, Illinois, Delaware, Florida, Maryland, Nevada, and Idaho. States with no income taxes include Florida, Alaska, Tennessee, South Dakota, Wyoming, and Washington.

Estate and gift tax

The IRS lifetime gift tax exclusion allows individuals to pass up to $13.61 million to heirs for the 2024 tax year without being subject to estate tax. Married couples can pass out double this amount.

You can also take advantage of the annual gift tax exclusion, which lets you pass up to $18,000 in 2024 to any number of people without worrying about gift tax. If you are married, you and your spouse can give up to $18,000 to each of your children, their spouses, and grandchildren, without having to file a gift tax return.

Medical expense deduction

Seniors with significant healthcare expenses have the option to itemize or deduct certain medical expenses. Seniors are allowed to deduct any medical expenses that exceed 7.5% of their AGI. Some of the eligible medical expenses that you can deduct include the cost of prescription drugs, health insurance premiums, mental health expenses, and senior care costs (in-home help and adult day services).

Conclusion

There are plenty of tax exemptions specific to the needs of senior citizens. Smart seniors should make sure they are leveraging as many of these tax exemptions as they qualify for, to help reduce their tax burden and boost their financial well-being during their golden years.

Most tax rates and exemptions are updated annually to reflect the changing economic circumstances around us. You should stay informed about the various tax exemptions available to seniors. If this feels overwhelming, don’t be shy about reaching out to qualified and accredited financial advisors for assistance. This will help you make certain you are using all the tax exemptions and benefits open to you as you age.