Eight Tax breaks available for retirees in 2024

Envision evenings by the sandy beach, weekends filled with family gatherings, and afternoons dedicated to hobbies – a potential retirement lifestyle. Yet, insufficient tax preparation could unexpectedly diminish your fixed income. Fortunately, the federal tax code offers various tax breaks designed for retirees, easing tax burdens and enhancing post-retirement income. Explore eight common tax breaks for retirement, but consider customizing your tax plan with a financial advisor to ensure optimal benefits.

Larger Standard Deduction

Every individual qualifies for a standard deduction, and it sees an increase once you reach the age of 65. Upon retirement, this elevated standard deduction means more money remains in your possession. In 2023, the standard deduction for a single taxpayer is $13,850 and $27,700 for joint filers. Upon turning 65, the standard deduction rises by $1,850 for single filers and $1,500 per spouse for married filers.

2. No More Withdrawal Penalties

Normally, withdrawing funds prematurely from retirement accounts like a 401(k) or IRA before reaching the age of 59 1/2 may result in penalties, which cease once this age is attained. This grants early retirees, in particular, increased financial flexibility. To illustrate, a retiree can withdraw $20,000 from their retirement account without incurring the standard 10% early withdrawal penalty, leading to a savings of $2,000.

3. Larger HSA Limit

Individuals aged 55 and above witness a $1,000 increase in the contribution limit to health savings accounts (HSAs), which are tax-advantaged accounts for health-related expenses. This adjustment empowers retirees to allocate more funds towards healthcare costs. Considering that healthcare expenses tend to escalate in retirement, the expanded HSA limit presents a significant opportunity for retirees to sufficiently save for these financial needs.

As an illustration, a retiree positioned in the 24% tax bracket could realize an additional $240 in tax savings as a result of the expanded HSA limit. This emphasizes the significance of prioritizing healthcare savings, particularly in the context of retirement.

4. Higher Tax-Filing Threshold

The tax-filing threshold represents the minimum gross income required for an individual to file a tax return. Retirees benefit from an elevated threshold. In 2023, seniors aged 65 or older have a threshold of $14,700 for single filers and $28,700 for joint filers (both 65 or older). Before turning 65, the threshold is $12,950 and $25,900, respectively. This heightened threshold provides retirees the opportunity to potentially bypass filing a tax return, resulting in potential savings on tax preparation costs.

5. Catch-Up Contributions

Catch-up contributions allow individuals aged 50 or older to contribute beyond standard limits to their retirement accounts, thereby facilitating increased savings for retirement. Seeking professional advice to maximize these contributions can substantially boost your retirement savings. In 2023, the 401(k) catch-up contribution limit is an additional $7,500, offering significant potential for extra portfolio growth over time.

6. Elderly Credit

Specific taxpayers aged 65 or older can qualify for the elderly credit, a tax break that has the potential to reduce the amount of tax owed by up to $7,500. Eligibility criteria for this credit include individuals with no dependents needing a gross income lower than $17,500. For married couples filing jointly, both spouses over age 65, the combined gross income must be less than $25,000 to qualify.

7. Additional IRA Deduction

Individuals contributing to an IRA can benefit from an IRA deduction, which is contingent on filing status and adjusted gross income. The IRS may permit a full deduction up to the contribution limit. For contributors aged 50 or older, an additional $1,000 is allowed as a catch-up contribution. Consequently, a retiree in the 22% tax bracket could potentially save an extra $220 on their tax bill through this deduction.

8. Qualified Charitable Distributions

Qualified charitable distributions involve tax-free distributions from an IRA directly to a charitable organization, effectively lowering a retiree’s taxable income. For instance, if a retiree makes a $5,000 distribution to a charity, it has the potential to reduce their taxable income, resulting in savings of up to $1,200 in taxes for someone in the 24% tax bracket.

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