Senior citizens enjoy some tax deductions and credits specific to older filers while also benefiting from adjustments to income that increase with age. Other tax filing perks, such as the capital gains tax exclusion on the sale of a main home, become more relevant for taxpayers transitioning into retirement and looking to cut back on expenses.
Higher Standard Deduction
If you or your spouse are 65 or older or blind, the standard deduction allowed by the Internal Revenue Service increases. As of the 2012 tax year, the increase equaled $1,150 for each qualifying situation for married taxpayers filing jointly, while single filers received an additional $1,450. For example, a married couple ages 65 and 67 qualify for two deductions totaling $2,300. If one spouse is blind, the total increases to $3,450. This sum is then added to the base deduction, such as $11,900 for joint filers, to determine the total standard deduction.
Credit for the Elderly
A portion of filers 65 or older with limited income qualify for a special tax credit for the elderly. The credit uses your age, adjusted gross income and nontaxable income to determine eligibility. The AGI limits range from $17,500 for a qualified single filer to $25,000 when two spouses meet the age test and file jointly. Nontaxable income is limited to $5,000 for singles and $7,500 for two eligible married filers. Nontaxable income includes pensions, annuity payments and Social Security, which largely limits this credit to seniors receiving minimal Social Security benefits and limited funds from other sources. The credit amount varies based on your income and is calculated using Schedule R, Credit for the Elderly or Disabled.
When you experience a long illness and pay medical or dental costs out-of-pocket, itemizing your expenses may net you a lower tax bill than the standard deduction. To calculate the deductible portion of medical expenses, you need your adjusted gross income for the tax year. Medical costs exceeding 7.5 percent of your AGI are deductible. For example, if your AGI was $50,000 during a tax year with $10,000 in medical expenses, multiply $50,000 by 7.5 percent to reach $3,750. Subtract $3,750 from your total costs of $10,000. The deductible portion of your medical expenses equals $6,250.
Capital Gains Exclusion
Many senior citizens choose to move into smaller homes or to a new area in retirement. If you sell a qualifying house -- a home you have owned for at least two years and used, or lived in, for two of the past five years -- you can exclude a portion of the gain on the sale of the home from your taxable income. Up to $500,000 of the gain counts as an exclusion for married filers when both partners used the home for at least two years. Single filers can exclude a maximum of $250,000 in home sale gains from income. The IRS limits taxpayer access to this exclusion to once every two years.
If you plan to keep contributing to your Individual Retirement Account as you grow older, take advantage of the annual contribution limit increase for taxpayers 50 and older. As of the 2013 tax year, the maximum contribution limit equals $6,500 or your total taxable income -- whichever is less -- compared with the $5,500 limit for younger filers. This provides an additional $1,000 adjustment to gross income when you contribute to a traditional IRA.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.