Tax Saving Tips for Retirees

They say wisdom comes with age, but so do tax savings! Once a taxpayer turns the big 5-0, the IRS makes tax time a little sweeter, but it gets even better when they turn 65. Here are some federal and state tax saving tips that will give taxpayers many more reasons to celebrate retirement.

Increased Standard Deduction for Retirees 65 and Older

Retirees who do not itemize tax deductions are able to claim an increased standard deduction once either they or their spouse turns 65. To claim the increased standard deduction, retirees must turn 65 years old any time during the tax year for which they are filing.

Married Filing Jointly - For couples filing jointly, the standard deduction is increased by $1,300 for each spouse who qualifies as 65 years or older when filing their joint tax return. Couples filing jointly who were both born before January 2, 1956 for the 2020 tax year, qualify for an additional tax break of $2,600. The tax saving benefits for a couple in the 24% tax bracket adds up to over $600.

Married Filing Separately - An individual who is married and filing separately can qualify for an additional $1300 standard deduction if they turned 65 during the tax year. There are special rules that qualify a taxpayer for more if their spouse qualifies as 65 years old or older, has no income, and is not filing a separate tax return.

Single or Head of Household - Those who are unmarried and not widowed and filing as either single or head of household, there is the tax saving benefit of an increased standard deduction of $1,650 for those who turned 65 during the tax year.

An additional amount, equal to the amount available to taxpayers 65 years old or older, applies for taxpayers who are blind. If you are over 65 years old and blind, you qualify for both increases to the standard deduction. The IRS defines blindness as 1) not being able to see better than 20/200 with your best eye with corrective lenses; or 2) your field of vision is 20 degrees or less.

Increased Tax Filing Threshold

Qualifying for the higher standard deduction translates into a higher filing threshold, which can mean more tax saving benefits depending on a taxpayer’s income. Most single individuals under 65 years old must file for the 2020 tax year if they earn more than $12,400. However, those who turned 65 years old in 2020 do not have to file unless they earned more than $14,050. For couples filing jointly if one spouse turned 65 or older, the threshold is increased to $26,100. If they both turned 65 or older in 2020, the threshold increases even further to $27,400. In most situations, a taxpayer’s filing threshold is equal to their standard deduction.

Social Security Income Tax Exemption

Another great tax saving benefit of retiring is the potential social security income tax exemption. To calculate whether Social Security income is taxable, taxpayers need to add up income from all sources, including taxable retirement income. Then add half of the amount of your Social Security benefits you received. You should receive a SSA-1099 from the Social Security Administration reporting the amount of Social Security benefits you received.

Those filing as single, head of household, or a qualifying widow(er), will not have taxable Social Security income if the total of all other income and half of Social Security is less than $25,000. For those filing jointly, this amount increases to $32,000. For taxpayers who are married and filing separate tax returns, the amount decreases to $0. If the income is above these limits, then up to 85% of Social Security benefits is taxable depending on total income.

The IRS has an interactive tool to use to determine how much, if any, of a taxpayer’s Social Security income is taxable.

Medical Expense Deduction

The deduction for medical expenses can help taxpayers with a lot of medical expenses reduce the amount they owe for taxes. For tax year 2020, only unreimbursed medical care expenses that exceed 7.5% of adjusted gross income qualify as a deduction, but they must be itemized on Schedule A. With the increase in the standard deduction, most taxpayers no longer itemize. However, if there are a lot of unreimbursed medical expenses, it can be worth keeping track of all out-of-pocket expenses.

Although taxpayers cannot deduct expenses reimbursed or paid for by insurance or from a FSA/HSA account, cosmetic procedures, or other purchases for general health like vitamins or health club fees, there are many expenses that can be deducted, including:

  • Insurance premiums (including Medicare premiums);
  • Preventative care, treatment, surgeries including medical expenses due to the Coronavirus;
  • Dental (including cost of false teeth);
  • Vision (including glasses and contacts);
  • Hearing aids;
  • Psychologist and psychiatrist visits; and
  • Travel expenses for medical care.

Example. David’s adjusted gross income (AGI) was $55,000, and he had $9,450 in medical expenses.

To determine the amount David is eligible to deduct for his medical expenses, his AGI of $55,000 must be multiplied by 7.5% or 0.075 ($55,000 x 0.075 = $4,125). David would qualify to deduct any medical expenses above $4,125. Since David had $9,450 in medical expenses, he would qualify for a medical expense deduction of $5,325 ($9,450 total qualified medical expense - $4. If David had no other deductions and qualifies for the standard deduction (most taxpayers do), the standard deduction is still going to be his best option.

Planning Tip: While most couples end up taking the standard deduction, it may not always be the best choice in the context of medical expenses. When one spouse has considerable unreimbursed medical expenses, it may be more beneficial for a couple to file their taxes as Married Filing Separately, as the 7.5% of AGI threshold is more difficult to reach based on combined income. If you have considerable medical expenses, have your tax professional run your returns both jointly and separately to see if you can find some additional savings by being able to itemize and deduct the unreimbursed medical expense.

Elderly and Disabled Tax Credit

The Elderly and Disabled Tax Credit can help taxpayers who turned 65 or older or retired on disability wipe out some, if not all, of their tax liability. The IRS considers someone 65 years old the day before their 65th birthday. This means for 2020 tax year to qualify for the credit based on age, a taxpayer needed to turn 65 on or before January 1, 2021. To qualify based on disability, they must have retired on permanent and total disability. Due to the increases in the standard deduction starting in 2018, this tax credit primarily helps single taxpayers. Filing as head of household, qualifying widow(er), or married, the required adjusted income limits reviewed below already reduce tax liability to zero.

To qualify, the taxpayer must file a joint tax return with their spouse unless they didn’t live with their spouse at all during the tax year. Also, their adjusted gross income must be less than the following to qualify:

  • Single, head of household, qualifying widow(er) - $17,500;
  • Filing jointly but only one spouse qualifies for this credit - $20,000;
  • Filing jointly and you both qualify - $25,000; and
  • Lived separately from your spouse and filing a separate return - $12,500.

In addition to adjusted gross income meeting the limits above, any nontaxable portions of Social Security benefits, pensions, annuities, and disability income must be under the limits below to qualify:

  • Single, head of household, qualifying widow(er) - $5,000;
  • Filing jointly but only one spouse qualifies for this credit - $5,000;
  • Filing jointly and you both qualify - $7,500; and
  • Lived separately from your spouse and filing a separate return - $3,750.

To qualify, both income thresholds above are required. The maximum deduction this credit allows is $380, and it is not refundable. If the amount of this credit is more than the taxes owed, the amount owed will be reduced to zero.

Ohio Tax Saving Benefits for Retirees

Ohio, like the IRS, offers tax saving benefits for retirees. Some retirement income like Social Security will not be taxed at all in Ohio. Generally, other retirement income, like distributions from your 401(k) or Traditional IRA, that is taxed on a taxpayer’s federal income tax return will be taxed on their Ohio State income tax return too. However, Ohio offers two retirement income credits and two credits to taxpayers 65 years old and older whose modified adjusted gross income less exemptions is less than $100,000.

Social Security/Tier I Railroad Retirement Income - Social Security and Tier I railroad retirement benefits are not taxed by Ohio. This means if any of these benefits are taxable on your federal tax return, a taxpayer can deduct them on their Ohio tax return on Schedule A.

Retirement Income Credit - The Retirement Income Credit is based on the total amount of retirement income a person has. The more retirement income, the larger the credit. The credit for an income of $5,001 - $8,000 is $130 for the 2020 tax year. It gradually increases for retirement income received above $8,000 and gradually decreases for retirement income received below $5,001. The minimum retirement income required to qualify for this credit is $500.

Lump Sum Retirement Credit - A taxpayer may be able to claim the Lump Sum Retirement Credit if they received a total, lump sum retirement distribution. Anyone who elects to take this credit cannot claim the Retirement Income Credit on the same tax return or any future tax return. This credit can be calculated using the Ohio tax worksheet found here.

Senior Citizen Credit - Anyone who turned 65 years old or older during the tax year is able to claim the Senior Citizen Credit for $50. This credit also is available on the Ohio school district income tax return.

Lump Sum Distribution Credit - Ohio gives taxpayers 65 years old and older the option to claim this credit instead of the Senior Citizen Credit if they received a total, lump sum distribution. Anyone who elects to take this credit cannot claim the Senior Citizen Credit on the same tax return or any future return. To calculate this credit, you can use the worksheet found on the bottom of the page here in the Ohio income tax instructions.

The Bottom Line

Retirees can qualify for more tax savings once they turn 50 and especially after they turn 65. Tax planning for and during retirement is extremely important.

Make sure you are making the most of these tax saving strategies. To make sure you are not leaving tax credits and deductions unclaimed, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.