Biggest tax breaks for people over 50

Key takeaways

• If you’re over 50, catch-up contributions allow you to make additional contributions to your retirement accounts and lower your taxable income.
• High medical expenses? You can deduct any qualified medical expenses, as long as they exceed 7.5% of your adjusted gross income (AGI).
• Contributions you make to a health savings account (HSA) are tax-deductible, the money grows tax-free, and any withdrawals you use for qualified medical expenses are also tax-free. And if you’re over 55, you can contribute even more to your HSA.
• If you’re 65 or older, you can take an increased standard deduction, which is a set amount that reduces your taxable income.
• The Credit for the Elderly or the Disabled is a tax credit designed to assist low- to moderate-income people who are either 65 or older, or retired on permanent and total disability.
• Strategically planning your Social Security withdrawals can help maximize your benefits and reduce the tax you owe.
• For people who are 70½ or older, making qualified charitable distributions (QCDs) can be a strategic way to support the causes you believe in while also enjoying significant tax benefits.

Plan for catch-up contributions

One of the most significant tax breaks for people over 50 is the ability to make catch-up contributions to your retirement accounts, like 401(k)s, 403(b)s, and IRAs. These contributions allow you to lower your taxable income while also saving more money each year, helping you boost your retirement nest egg.

What are catch-up contributions? They are additional amounts that you can contribute to your retirement accounts once you turn 50. The government introduced this benefit to help people nearing retirement age to make up for any lost time or savings. It's a way to accelerate your retirement savings and take advantage of tax benefits at the same time.

For 401(k) and 403(b) plans, the standard contribution limit is $23,000. However, if you're 50 or older, you can contribute an additional $7,500, bringing your total potential contribution to $30,500 annually. Similarly, for IRAs, the contribution limit is $7,000, but those over 50 can add another $1,000, making it $8,000 in total.

Take advantage of medical expense deductions

As we age, medical expenses often increase. Fortunately, the tax code offers a significant break when it comes to deducting medical expenses. This deduction can help reduce your taxable income, potentially lowering your overall tax and easing some of the financial burdens associated with healthcare costs.

What qualifies as medical expenses?

Medical expenses include a wide range of costs related to not only treating disease, but also preventing, diagnosing, mitigating, and curing it.

This can cover…

• Doctor visits
• Hospital stays
• Prescription medications
• Over-the-counter drugs if prescribed by your doctor
• Hearing aids
• Glasses
• Wheelchairs
• Long-term care expenses
• Insurance premiums

You can deduct any of your qualified medical expenses that are greater than 7.5% of your adjusted gross income (AGI). For example, if your AGI is $50,000, you can deduct the amount of your total medical expenses that exceed $3,750 (7.5% of $50,000). In other words, you can deduct only expenses above this amount from your taxable income.

To take full advantage of this deduction, keep detailed records of all your medical expenses throughout the year. Save receipts, bills, and any other documentation that supports your claims.

Be aware that you must itemize your deductions to claim medical expenses. This means you can't take the standard deduction and must list all your eligible expenses. While itemizing can be more complex, it might be worth the effort if you have high medical expenses.

Consider making HSA contributions

Health savings accounts (HSAs) offer an easy way to save for medical expenses while also providing significant tax benefits. For people over 50, contributing to an HSA can be an excellent strategy to manage healthcare costs in retirement while enjoying various tax advantages.

An HSA is a tax-advantaged account designed to help you save for medical expenses. The contributions you make to an HSA are tax-deductible, the money grows tax-free and rolls over each year, and any withdrawals you use for qualified medical expenses are also tax-free.

If you're 55 or older, you can contribute more to your HSA through catch-up contributions. For the tax year 2024, the maximum contribution limit is $4,150 for individuals and $8,300 for families. However, if you are 55 or older, you can contribute an additional $1,000 to your HSA.

HSAs can be a fantastic tool for retirement planning, allowing you to build a nest egg for healthcare expenses throughout retirement. After you turn 65, you can also use HSA funds for non-medical expenses penalty-free. But keep in mind that you will pay regular income tax on those withdrawals.

Another thing to note is that if you're over 65 and enrolled in Medicare, you can no longer contribute to an HSA. However, you can still use the funds in your account to pay for qualified medical expenses, including certain premiums, without facing a tax penalty.

Standard deduction increase

One of the most straightforward and beneficial tax breaks for people 65 and older is the increased standard deduction. This boost can help lower your taxable income without the need for itemizing, simplifying your tax return while offering significant savings.

The standard deduction is set by the IRS each year and reduces your taxable income without the need for itemizing. The government adjusts this amount each year for inflation. It’s a no-questions-asked reduction in your taxable income. In other words, you don’t have to provide any documentation or proof of expenses to claim it.

If you are 65 or older, the standard deduction gets even better. The standard deduction for a single filer is $14,600. However, if you're 65 or older, you get an additional $1,950 added to your standard deduction. For married couples filing jointly, the standard deduction is $29,200. However, you can add $1,550 for each spouse over 65.

Claim the Credit for the Elderly or the Disabled

The Credit for the Elderly or the Disabled is a tax credit designed to assist low- to moderate-income people who are either 65 or older or retired on permanent and total disability. Unlike deductions that reduce your taxable income, a tax credit directly reduces tax, making it a powerful tool for lowering the amount you owe.

To qualify, your AGI and Social Security or other nontaxable income from annuities, pensions, or disability must fall below specific limits.

The Credit for the Elderly or the Disabled ranges from $3,750 to $7,500. The IRS uses your filing status, age, and income to determine the amount of the credit.

Plan withdrawals of Social Security benefits

Deciding when and how to withdraw your Social Security benefits is a crucial part of retirement planning. Did you know that the timing of your withdrawals can significantly impact your tax situation and overall retirement income? By strategically planning your Social Security withdrawals, you can maximize your benefits and reduce the tax you owe.

The earliest you can start receiving Social Security benefits is when you reach 62. But it’s important to note that if you do so, it will reduce your monthly benefit amount. For Social Security purposes, your full retirement age (FRA) is typically around 66 or 67, but your exact FRA depends on the year you were born. If you delay benefits beyond your FRA, your benefit amount increases until age 70. Deciding the best time to start withdrawals depends on many factors, including your financial needs, health, and other sources of retirement income.

If Social Security is your only source of income, you likely won't owe tax on it. However, if you have other sources of income, such as a pension, part-time work, or withdrawals from retirement accounts, a portion of your benefits could be taxable. Luckily, there are a few things you can do to reduce tax on Social Security.

How to minimize tax on Social Security

• If possible, delay taking Social Security benefits until age 70. This increases your monthly benefit amount and may help you stay within a lower tax bracket in earlier retirement years.
• Coordinate withdrawals from retirement accounts and other income sources to minimize your combined income. For example, consider withdrawing from Roth IRAs, which are not included in the combined income calculation, before tapping into traditional IRAs or 401(k)s.
• Plan your withdrawals in a tax-efficient manner. For instance, if you have a low-income year, you might withdraw more from traditional retirement accounts to take advantage of lower tax rates.
• Converting traditional IRA or 401(k) funds to a Roth IRA before you start taking Social Security benefits can reduce taxable income in future years. While you'll pay taxes on the conversion amount, future withdrawals from the Roth IRA will be tax-free.
• Keep an eye on your income and adjust your withdrawals to stay below the thresholds that trigger higher taxation on your Social Security benefits.

With so many different variables in the mix, finding the right retirement strategy to maximize your tax savings can be complicated. The good news is that you don’t have to do it alone. Work with a Tax Pro who can help you get it right.

Make qualified charitable distributions

For people who are 70½ or older, making qualified charitable distributions (QCDs) can be a strategic way to support the causes you believe in while also enjoying significant tax benefits. QCDs allow you to directly transfer funds from your IRA to a qualified charity, providing a win-win situation for both you and the charitable organization.

QCDs can be made up to $105,000 per year (or $210,000 for married couples) and count toward your required minimum distribution (RMD) for the year, but the transferred amount is not included in your taxable income.

The benefits of QCDs

• The amount transferred through a QCD is not included in your taxable income. This can help lower your overall tax and potentially keep you in a lower tax bracket.
• QCDs count toward satisfying your RMDs, which can reduce your taxable income for the year.
• Since the distribution goes directly to the charity, it allows you to make significant charitable contributions without affecting your taxable income.

To make a QCD, the distribution must meet specific requirements

• You must be 70½ or older at the time you make the distribution.
• You must make the distribution from a traditional IRA, not a SEP or SIMPLE IRA
• You must transfer the funds directly from your IRA to the charity. You cannot take the distribution first and then donate the money.
• The charity must be a qualified organization. Donor-advised funds and private foundations typically do not qualify.

Keep in mind that, even though the QCD amount is not included in your taxable income, you must still report it on your tax return.

File your income taxes with your local Jackson Hewitt Tax Pros

For people over 50, there are numerous opportunities to reduce your tax burden and enhance your financial well-being. From making catch-up contributions and taking advantage of medical expense deductions to leveraging the increased standard deduction, each strategy offers unique benefits.

These tax breaks can help you secure a more comfortable and financially stable future. Work with a Jackson Hewitt Tax Pro to help you stay informed, plan ahead, and make the most of the tax benefits available to you as you enjoy your golden years.