If you have just retired or are planning retirement, there are key tax deductions and credits that can help you save money.
Whether you're retired or not
It's no surprise that baby boomers are retiring in large numbers. But if you're a boomer, or someone born between 1946 and 1964, you may be surprised to learn that many tax deductions and credits apply to those at retirement age. Let's take a closer look at the top four deductions and credits that baby boomers should be aware of this tax season.
1. Higher standard deduction
As you may know, the standard deduction, which is taken by taxpayers who don't itemize, nearly doubled in 2018. But what you may not know is that the standard deduction is even higher if you're 65 or older by December 31 of the tax year for which you're filing.
For tax year 2022, if you're married and filing jointly, you'll have a standard deduction of $1,400 more per qualifying spouse than younger taxpayers. If you're filing single or head of household, the increase is $1,750.
2. Credit for the elderly or disabled
When baby boomers are retiring, there's a special tax credit you'll want to ensure you're familiar with — the Credit for the Elderly or Disabled. You can claim this credit if you're at least 65 by the end of the tax year. If you aren't yet 65 but you're retired on permanent disability and you received taxable disability income during the tax year, you can also qualify for this credit.
Additionally, there are income limits on the Credit for the Elderly or Disabled that vary based on your filing status and whether you and your spouse are both claiming the credit.
- Your adjusted gross income and your total nontaxable annuity, pension, and disability income amounts must both be under the income limits in order to qualify.
- For instance, if you are married filing jointly and both spouses qualify for the credit, you cannot take the credit if your adjusted gross income is equal to or more than $25,000.
- With those same filing circumstances, you also cannot take the credit if the total of your nontaxable social security, annuities, pensions, and disability income is more than $7,500.
To claim this credit, you'll fill out and submit Schedule R and attach it to your Form 1040 or Form 1040-SR. You can't claim this credit when filing Form 1040-NR. The elderly credit you'll receive ranges from $3,750 to $7,500, depending on your filing status and your spouse's age if filing jointly. This tax credit will reduce your income tax. However, if you're eligible for a credit higher than your income tax bill, you won't receive the excess credit as a refund.
3. Charitable contributions
Charitable contributions are deductible only if you itemize. This applies to cash donations as well as donated items for which you'll deduct the fair market value of those donations. Typically, you can deduct contributions up to 60% of your adjusted gross income when itemizing. For this reason, it might be a good idea to make several big charitable donations all in one year.
For tax year 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows taxpayers to deduct up to $300 in charitable cash contributions as an "above the line" deduction even if you aren't itemizing. If you made a cash donation, make sure you take this deduction. For tax year 2021, this amount increases to $600 for charitable cash contribution for married filing joint filers and remains at $300 for other filers.
4. Property taxes
It's not just the federal government that's giving out tax breaks when baby boomers are retiring. Local and state governments in many places also offer property tax breaks to older individuals who own property in their jurisdictions. Not all areas offer these breaks, but the ones that do typically have criteria to meet. Common requirements include:
- You must be 65 years old (some jurisdictions allow breaks if you're at least 61).
- If you're married, at least one spouse must meet the age requirement.
- You've owned your home for a certain amount of time.
- You live in the home and use it as your primary residence.
- Your income is less than a certain amount.
Additionally, if you itemize your federal tax deductions, you can deduct what you’ve paid in property taxes and other certain state and local taxes. This state and local tax (SALT) deduction is capped at $10,000 per year and allows taxpayers to deduct property taxes and either their state income tax or state sales tax.
When it comes to tax breaks, your age may give you even more reasons to smile this tax season.
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