There are a number of unique tax liabilities and advantages specific for people once they turn 65. It is important to understand changes in taxes specifically based on age, health,income levels, and filing status once people have reached retirement age.
For example, a common surprise to many seniors is that they can owe taxes on their Social Security benefits — in fact as much as 85% of the annual benefit can be taxable depending on a person’s source(s) of income, total amount of income, and their filing status. But, when it comes to tax deductions for seniors, there are age-based bonuses that will amplify the standard deduction for anyone age 65 and older.
Understanding what a person could owe in taxes is only half of the equation to calculating what real income is. Paying taxes is one thing but taking advantage of every deduction and exemption to reduce those taxes is quite another. There are a number of opportunities that seniors can take advantage of based on factors such as income, age and health which will reduce tax liabilities.
- Medicare Premiums- If a person is self-employed and not eligible to receive group coverage, premiums paid for Medicare Part B and D, Medigap, or Medicare Advantage plans are deductible.
- Pension Payout- If a person at retirement is to receive a lump-sum or rollover pension payout directly they are subject to an automatic 20% withholding tax. To avoid this, simply make sure the payout or rollover is sent directly to an IRA rollover account.
- Investment Income- After the age of 65, income in the form off investment dividends, interest or capital gains is taxed at a lower rate of 15% and is exempt from Social Security or Medicare taxes.
- Sale of a Home- A person who has lived in their home for at least two of the last five years prior to its sale will not pay taxes on $250,000 as an individual or $500,000 as a married couple.
- Medical Expenses- If a person will itemize deductions, they can deduct medical expenses (including dental) that exceed 7.5% of their Gross Adjusted Income (AGI).
- Family Gifting- For a person facing possible estate taxes after their death, gifting money to family members will help alleviate some of the burden. An individual can gift $15,000 to each family member, and a spouse can gift another $15,000 as well and then these accumulated amounts are excluded from future estate taxes.
- Health Coverage Tax Credit (HCTC)- IRS tax credit extended through 2021, people with qualifying health coverage for the HCTC will receive a tax credit to offset the cost of health insurance premiums for the year.
- Loans and a Reverse Mortgage- Because the funds received from a loan or a Reverse Mortgage are borrowed and not income, they are not subject to taxes.
- VA Aid & Attendance Benefits- Payments made to qualified veterans and/or spouses are not taxable.
- Life Settlements- If the owner of a life insurance policy is diagnosed with chronic health conditions (2 ADL’s or more) or terminal conditions (2 years or less of life expectancy) the funds received from the sale (life settlement) of their policy are HIPAA exempt from Federal taxes. Also, any funds received at or below the basis (premium payments) that the policy owner has in their policy is exempt from taxation.
Making accurate financial decisions to budget for the cost of living can’t be done without calculating the impact of taxes owed and how to offset that with tax-deductions. It is critical to establish a financial reality based on how much money a person has to actually put in their pocket. Seniors are in a unique position to take advantage of a number of unique tax-breaks based on their income, age and health that if used correctly can reduce the burden of paying taxes.
Chris Orestis, President of LifeCare Xchange and known as the Retirement Genius, is a nationally recognized senior care advocate and expert in retirement, long-term care and specialty senior living funding solutions. The author of two books, numerous published papers and articles, and a frequent industry speaker; he is the innovator that brought the LTC Life Settlement into the market over a decade ago.
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