What Are the Tax Benefits for Over 55?

The U.S. tax code provides several benefits for individuals as they get older, particularly for those over age 55. These provisions can be a factor in managing personal finances, especially during the pre-retirement and retirement years. Understanding these tax rules can help preserve savings. The available benefits address various aspects of financial life, from annual tax filing to major events like selling a home.

Enhanced Standard Deductions and Tax Credits

As taxpayers age, the tax code offers benefits that can lower their annual income tax liability. Individuals who are age 65 or older are entitled to a higher standard deduction than younger taxpayers. For the 2024 tax year, this additional amount is $1,950 for a single individual or head of household. A married couple filing a joint return can add $1,550 for each spouse who is age 65 or over, reducing taxable income without itemizing.

Beyond the increased standard deduction, certain individuals may qualify for the Credit for the Elderly or Disabled. This nonrefundable credit is for taxpayers who are 65 or older, or those under 65 who are retired on permanent and total disability. Eligibility is restricted by income limits, as the credit is targeted toward those with lower incomes.

The calculation for the credit begins with a base amount, which is then reduced by certain nontaxable income, such as Social Security, and by an amount based on the taxpayer’s AGI. This credit provides a direct dollar-for-dollar reduction of tax owed, which is different from a deduction that only reduces taxable income.

Retirement Account Tax Advantages

The tax code encourages continued saving for retirement through “catch-up contributions” for those age 50 and over. These provisions allow older workers to contribute more to their retirement accounts than standard limits. For 2024, an individual age 50 or over can contribute an additional $7,500 to a 401(k) or 403(b) plan, bringing the total potential contribution to $30,500.

Similar rules apply to other retirement accounts. For Individual Retirement Arrangements (IRAs), the catch-up contribution for those 50 and older is $1,000. This raises the total possible IRA contribution to $8,000 for 2024. For SIMPLE IRA plans, the catch-up amount is a lower figure but still allows for extra savings.

Another age-related milestone is reaching age 59½. This is the age at which withdrawals can be taken from most retirement plans, such as 401(k)s and Traditional IRAs, without incurring the 10% early withdrawal penalty. Ordinary income tax will still be due on withdrawals from traditional, pre-tax accounts.

As individuals continue to age, Required Minimum Distributions (RMDs) come into play. The SECURE 2.0 Act raised the age at which they must begin. Currently, individuals must start taking RMDs from their retirement accounts in the year they turn 73.

Tax Treatment of Social Security Benefits

The taxation of Social Security benefits depends on your “provisional income,” also called combined income. The calculation is your modified adjusted gross income (MAGI), plus one-half of the Social Security benefits you received during the year, plus any tax-exempt interest income.

The amount of your Social Security benefits that is taxable is determined by how your provisional income compares to IRS thresholds. If your provisional income is below $25,000 for a single filer, or $32,000 for a married couple filing jointly, none of your Social Security benefits are taxable.

If your provisional income falls between the first and second thresholds, up to 50% of your Social Security benefits may be included in your taxable income. Should your provisional income exceed the second, higher threshold, up to 85% of your benefits could be taxable. These income brackets are not indexed for inflation.

Excluding Gains from a Home Sale

A tax benefit for homeowners is the ability to exclude capital gain from the sale of a primary residence. Under Internal Revenue Code Section 121, a single filer can exclude up to $250,000 of gain, and a married couple filing jointly can exclude up to $500,000. This tax break is often used by seniors who are downsizing or relocating in retirement.

To qualify for this exclusion, the taxpayer must meet both an ownership test and a use test. The ownership test requires that you have owned the home for at least two of the five years leading up to the sale. The use test requires that you have lived in the home as your main residence for at least two of the five years before the sale.

This provision can be used more than once, but not more often than once every two years. The exclusion applies to the profit from the sale, calculated by subtracting the home’s basis—the purchase price plus the cost of any capital improvements—from the final sale price.

Deducting Medical Expenses

As healthcare needs often increase with age, medical expenses can become a substantial part of a budget. The tax code allows taxpayers who itemize to deduct the amount of their medical expenses that exceeds 7.5% of their adjusted gross income (AGI). This threshold means the benefit is primarily for those with significant healthcare spending relative to their income.

A wide range of costs can be counted toward this deduction, including:

• Premiums for health insurance, such as for Medicare Part B and Part D, as well as for supplemental Medigap policies
• Payments for long-term care insurance premiums, though the deductible amount is subject to limits that increase with age
• Payments for prescription drugs
• Dental and vision care
• Hearing aids
• Necessary in-home care