As you approach retirement age, the urgency of securing your financial future becomes increasingly apparent. The proximity of retirement means a diminishing window for accumulating savings. Even if your financial standing surpasses that of your peers in the same age bracket, it remains imperative to capitalize on any available avenues for savings.
Thankfully, the government has devised a range of tax incentives tailored explicitly for individuals aged 50 and above. These incentives are strategically designed to empower older workers with enhanced opportunities to increase their savings.
By leveraging these tax breaks, you can increase your retirement nest egg, thereby affording yourself a more secure and comfortable future.
Here are 7 little known tax breaks for people over 50.
1. Increased standard deductions
When it comes to tax filing, the majority of individuals typically find themselves at a crossroads between itemizing their expenses or opting for the standard tax deduction, the latter of which undergoes annual adjustments.
However, for those aged 65 and above, there exists an additional tax advantage in the form of a $1,850 deduction for individuals. This particular deduction can be a game-changer, as it serves to further reduce their taxable income.
What’s noteworthy is that this increased deduction isn’t limited solely to individual taxpayers; it extends its benefits to married couples who file jointly as long as one spouse is 65 or older. Embracing this opportunity can make a substantial difference in your tax liability, ultimately preventing unnecessary spending of your hard-earned retirement savings.
In essence, this tax provision serves as a financial safeguard for seniors, providing them with a valuable means to preserve their retirement nest eggs. By staying informed and capitalizing on this deduction, older individuals and couples can take significant steps towards securing their financial well-being during retirement.
2. Increased IRA contributions
In broad terms, the funds you allocate to individual retirement accounts (IRAs) are typically exempt from being categorized as taxable income. To regulate the extent of contributions to specific retirement vehicles, the IRS imposes contribution limits. For the majority of younger individuals in the workforce, this cap stands at $6,500 annually for IRA contributions.
Nevertheless, as individuals advance in age and approach their retirement years, their financial objectives often require them to intensify their savings efforts. Fortunately, there’s a provision in place to accommodate this need: once you reach the age of 50 or older, you gain the ability to increase your contributions to your IRA. At this stage, you are allowed to contribute up to $7,500 per year to your IRA.
This increased contribution limit can be a crucial tool for those striving to increase their retirement savings in the final stretch leading up to retirement.
3. Increased 401(k) contributions
Likewise, for individuals below the age of 50, there exists a cap on their annual contributions to retirement accounts such as the 401(k), which stands at $22,500.
However, as individuals advance beyond the age of 50 and approach retirement, there is a valuable provision known as the “catch-up” contribution. This allows them to significantly increase their annual contributions, offering the opportunity to allocate up to $30,000 per year to their retirement accounts.
The “catch-up” provision serves as a financial lifeline for those nearing retirement age, acknowledging the need to accelerate their savings efforts in preparation for their golden years. It offers a vital tool for enhancing their financial security, giving them the means to bridge the gap between their current savings and the retirement lifestyle they aspire to achieve.
4. Medicare premium deduction
If you decide to embark on self-employment ventures post-retirement, there’s a tax advantage waiting for you concerning your healthcare expenses. Specifically, you have the opportunity to deduct the premiums associated with Medicare Part B, Medicare Part D, supplemental Medicare plans, and Medicare Advantage from your taxable income.
What makes this deduction particularly appealing is that it doesn’t necessitate the itemization of other expenses on your tax return. It’s a straightforward way to reduce your taxable income and potentially lower your overall tax liability.
It’s essential, however, to bear in mind a crucial eligibility criteria: you can only claim these Medicare premiums as deductions if you lack coverage from other sources, notably employer-sponsored health care. This means that if you or your spouse still benefit from health insurance through a post-retirement job, this tax deduction may not apply to your situation.
5. Increased Health Savings Account contributions
Similar to the tax benefits offered by contributing to IRAs and 401(k) accounts, your pre-tax contributions to a health savings account (HSA) serve to reduce your yearly taxable income.
For the upcoming 2023 tax year, individuals who are below the age of 55 have the opportunity to contribute up to $3,850 to their HSA if they have individual coverage, or up to $7,750 for those with family plans.
What’s particularly advantageous, especially for those nearing retirement, is the provision that allows for additional contributions once you reach the age of 55 before the end of the tax year. This “catch-up” contribution lets you allocate an extra $1,000 annually to your HSA. This not only enhances your ability to cover medical expenses but also results in a further reduction of your taxable income.
6. Penalty-free IRA withdrawals
Ordinarily, individuals who initiate withdrawals from their Individual Retirement Accounts (IRAs) prior to reaching the age of 59.5 face a substantial penalty of 10%. Nonetheless, once you’ve attained the age of 59.5, a notable financial advantage comes into play: you are exempt from this 10% penalty.
This exemption grants you the freedom to access your IRA funds without incurring any fines or penalties, regardless of the reason for the withdrawal. This newfound flexibility allows you to put your money to work for you in various ways. You can choose to invest it in opportunities that can generate additional income, thus potentially enhancing your financial situation in retirement.
7. Property tax benefits
Your eligibility for property tax relief hinges on a combination of factors including where you live, your age, and your income level.
For example, Washington state offers property tax exemptions to homeowners aged 61 or older, provided they meet specific criteria related to disability or income. This exemption can translate into substantial savings on property tax bills, offering financial relief to eligible senior citizens.
In Texas, homeowners aged 65 and above have the potential to benefit from a property tax exemption that can reach up to $10,000. This exemption can significantly reduce the property tax burden for seniors, enhancing their financial security in retirement.
These state-specific property tax breaks underscore the importance of exploring local regulations and incentives tailored to your circumstances. By taking advantage of such opportunities, retirees can alleviate the financial strain associated with property taxes, allowing them to better allocate their resources for a more comfortable retirement.
