9 Things Tax Filers Over 65 Need To Know in 2023

elderly couple working out a budget while sitting on the living room sofa
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Taxes can be complicated. But understanding them can save you hundreds (or thousands) of dollars per year.

If you are 65 or older, there are some unique tax deductions and opportunities to save on your annual tax bill. And every dollar counts, especially if you are on a fixed income or are reliant on income sources such as Social Security.

While we always advise consulting a tax professional for your overall tax planning needs, we’ve uncovered some of the less-known tax breaks that seniors can benefit from. So, if you’re in retirement, or approaching it, review these tax planning strategies to stretch your income further in 2023.

You Can Pay 0% Capital Gains Taxes

If you are looking for some tax-free income in 2023, consider selling an appreciated asset.

Jonathan Bird, a certified financial planner from Farnam Financial, said, “You can potentially lock in capital gains at a 0% federal tax rate. The threshold in 2023 for a 0% tax rate on capital gains is $89,249 for married couples. If you have stock or real estate price appreciation, this is a terrific opportunity to lock in gains at a 0% federal tax rate.”

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You Probably Need To File a Tax Return

While many retirees think they are exempt from filing tax returns because their working days are over, this is far from the truth.

Doug Amis, a certified financial planner and CEO of Cardinal Retirement Planning, said, “If you are receiving income other than Social Security and over 65, it’s pretty much a requirement to file a tax return annually.”

While some circumstances would exempt you from filling, this is not the case for a majority of retirees.

Medicare Might Be Deductible

If you are in retirement but still have active income from self-employment, you might be able to deduct Medicare expenses on your tax return. Medicare becomes available at age 65, and premiums can be costly in addition to supplemental coverage.

But your business income can deduct Medicare Part B and Part D premiums and Medicare Advantage plans (or Medigap policies). Just make sure you aren’t eligible for any healthcare plans through your employer (or your spouse’s job), or you cannot take the deduction.

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You Can Avoid Pension Tax Withholdings

In most cases, if you choose to receive a lump sum payment from your pension or other workplace retirement plan, your company is required to withhold 20% of that money for federal tax purposes.

While you can get some of the money back via your tax return, the 20% withheld also might be considered a taxable distribution, further complicating your tax burden for the year.

But there is a loophole. If you ask your company to send the lump sum amount directly to your IRA provider (and not to you), they are not obligated to withhold the 20% for taxes. This allows you to transfer all your funds from a pension or other workplace retirement plan without the extra tax withholding.

Low Income Credits Are Available

If you or your spouse are over the age of 65 and meet certain income requirements, you may be eligible for a tax credit. 

The Credit for the Elderly or Disabled is available to taxpayers who have annual incomes of $17,500 or less ($20,000 if just one spouse is over 65, and $25,000 for married couples filing jointly). In addition, the non-taxable part of your Social Security or other non-taxable pensions, annuities or disability income must be less than $5,000 (of $7,500 if married filing jointly).

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This credit can directly reduce your tax bill by up to $750 (or $1,125 for married couples filing jointly). You can find the calculation for the credit in IRS Schedule R.

You Can Give to Charity Directly From Your IRA

There is a way to lower your taxes with charitable contributions, even if you are not itemizing your taxes. Known as the qualified charitable distribution (QCD), the provision allows you to donate directly from your IRA.

If you are age 70½ (or older), you can give up to $100,000 per year to charity, directly from your traditional IRA. The donations are excluded from your taxable income. Better yet, these distributions are considered part of your RMD, satisfying the requirement and lowering your tax bill at the same time.

You Can Avoid Gift Taxes (Every Year)

You don’t need to wait until you’re 65 to give money to your family, but if you expect to exceed the lifetime gift tax exclusion amount of $12.92 million (or double that amount if married), you can begin gifting money while you are alive to avoid more taxes in the future.

According to the IRS, you can give up to $17,000 yearly to your family, including children or grandchildren, without paying any gift taxes. Moreover, the $17,000 does not count toward your $12.92 million total exemption.

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If you begin giving $17,000 per year to each of your children and grandchildren, you can reduce your taxable estate by hundreds of thousands of dollars by the time you die.

You Should Consider Municipal Bonds for Retirement Income

In retirement, creating a balanced investment portfolio of equities and fixed-income investments is important. While many fixed-income options exist, consider allocating some of your retirement savings to municipal bonds for additional tax savings.

Municipal bonds are fixed-duration loans to a local or state government entity, and you collect a fixed interest rate. At maturity, you receive your principal investment back along with accrued interest. The income from municipal bonds is exempt from federal taxes.

Avoid These 11 States for Social Security Income Tax Savings

Social Security is taxable income on your federal taxes, but there are 11 states that collect income tax on it as well: 

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • Rhode Island
  • Utah
  • Vermont

If you plan on downsizing or moving before collecting your Social Security income, consider possibly avoiding these states to reduce your income tax burden.

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