The Top 10 Tax Deductions Most Seniors Miss
Now, let’s explore the key deductions and tax benefits that can significantly lower your tax bill. Review this list carefully to see which ones apply to your financial situation.
1. The Higher Standard Deduction for Seniors
This is the easiest and most common tax benefit for seniors, yet some forget to claim it, especially if filing on their own for the first time. The IRS allows you to increase your standard deduction if you or your spouse are age 65 or older. You get an additional amount if you are legally blind.
How it works: For the 2023 tax year (filed in 2024), a single individual under 65 gets a standard deduction of $13,850. If you are 65 or older, you can add an extra $1,850, bringing your total standard deduction to $15,700. If you are married and filing jointly, and both you and your spouse are 65 or older, you both get the additional amount, increasing your standard deduction by $3,100 total.
2. Medical and Dental Expense Deductions
This is perhaps the most significant itemized deduction for retirees. Healthcare costs often rise with age, and the tax code provides some relief. You can deduct the portion of your total medical expenses that exceeds 7.5% of your Adjusted Gross Income (AGI).
How it works: First, calculate 7.5% of your AGI. Let’s say your AGI is $50,000. That threshold would be $3,750 ($50,000 x 0.075). Next, add up all your qualifying medical expenses for the year. If your total was $8,000, you could deduct the amount that is over the threshold: $8,000 – $3,750 = $4,250.
Commonly missed deductible expenses include:
- Premiums for Medicare Part B and Part D.
- Premiums for supplemental health insurance (Medigap).
- Premiums for long-term care insurance (subject to age-based limits).
- Out-of-pocket costs for prescription drugs, dental care (including dentures), eyeglasses, and hearing aids.
- Transportation costs to and from medical appointments (you can deduct a standard mileage rate or actual costs like gas and oil).
- Costs for in-home care if it is primarily for medical purposes.
Keep meticulous records and receipts for all medical-related spending throughout the year. For official federal tax information, you can always visit the IRS.
3. Qualified Charitable Contributions (QCDs)
If you are charitably inclined and are over age 70½, a Qualified Charitable Distribution (QCD) is a fantastic tax-saving tool. A QCD allows you to donate up to $100,000 directly from your IRA to a qualified charity. This is more powerful than a standard donation because the money is excluded from your taxable income. It also counts toward your Required Minimum Distribution (RMD), satisfying that obligation without increasing your income.
How it works: Instead of taking your RMD, having it taxed, and then writing a check to charity, you instruct your IRA custodian to send the funds directly. This lowers your AGI, which can help you qualify for other deductions and potentially reduce your Medicare premiums.
4. State and Local Taxes (SALT)
If you itemize, you can deduct state and local taxes, but this deduction is capped at $10,000 per household, per year. This includes a combination of property taxes and either state income taxes or state sales taxes. Most people deduct their income tax, but if you live in a state with no income tax or made a very large purchase (like a car), deducting sales tax might be more beneficial.
5. The Home Sale Exclusion
Many seniors decide to downsize in retirement. If you sell your primary home, you can exclude a significant amount of the profit from capital gains tax. A single filer can exclude up to $250,000 of gain, and a married couple filing jointly can exclude up to $500,000. To qualify, you must have owned and used the home as your main residence for at least two of the five years leading up to the sale.
6. Credit for the Elderly or Disabled
This is a tax credit (remember, that’s a dollar-for-dollar reduction of your tax bill) designed for lower-income seniors. The eligibility rules are quite strict, which is why it is often missed. You must be age 65 or older OR retired on permanent and total disability. Your income must fall below certain limits. For example, for a single person, your AGI must be under $17,500, and your non-taxable Social Security benefits must be under $5,000. While the limits are low, it can provide meaningful relief for those who qualify.
7. Tax-Free Social Security Benefits
This isn’t a deduction, but it’s a critical rule that helps you keep more of your money. Depending on your “combined income” (your AGI plus non-taxable interest plus one-half of your Social Security benefits), a portion of your Social Security benefits may be tax-free.
- If your combined income is below $25,000 (for single filers) or $32,000 (for married couples), your benefits are not taxed.
- If your income is between $25,000 and $34,000 (single) or $32,000 and $44,000 (married), up to 50% of your benefits may be taxable.
- If your income is above those higher thresholds, up to 85% of your benefits may be taxable.
Understanding these thresholds can help you manage your other retirement withdrawals to minimize the tax on your Social Security income. For the most accurate details on your benefits, visit SSA.gov.
8. Investment or Brokerage Fees
While the 2017 tax law eliminated the deduction for investment advisor fees for most people, you can still deduct certain fees as an itemized deduction. The key one is interest expense—that is, if you borrowed money to make investments (known as “buying on margin”), you can deduct the interest you paid on that loan, up to the amount of your net investment income.
9. Business Expenses for a Side Hustle
Retirement is often a time to turn a hobby into a small business or do some consulting work. If you are self-employed, you can deduct ordinary and necessary business expenses. This can include a portion of your home expenses if you have a dedicated home office, supplies, mileage for business-related travel, and marketing costs.
10. Gambling Losses
This might seem surprising, but if you have winnings from gambling (casinos, lottery, etc.), you must report that as income. The silver lining is that you can also deduct your gambling losses as an itemized deduction, but only up to the amount of your winnings. You cannot deduct more than you won. So, if you won $1,000 during the year but lost $1,500, you can only deduct $1,000 of your losses, bringing your net taxable gambling income to zero.
