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A record-breaking 4.1 million Americans turn 65 this year. If you're among that group of beautiful boomers, you may be examining the details of your post-retirement budget, trying to sort it all out.
Learning the ins and outs of everything from Social Security to Medicare is like learning a new language -- and part of what you need to know is how big a role income taxes will play in your monthly budget. One of the most important things you can learn is where the sweetest tax breaks can be found. Here, we'll show you.
1. Standard deduction bump
As you file income taxes next year, you may be surprised to learn that your standard deduction is a bit higher than expected. That's because the IRS allows a more significant deduction for those who've turned 65 by Dec. 31, 2024, and do not itemize their taxes. Here's an idea of what you can expect for the 2024 tax year:
| Filing Status | Standard Deduction | Extra Deduction for those over 65 | Total 2024 Deduction |
|---|
| Single filers | $14,600 | $1,950 | $16,550 |
| Head of household | $21,900 | $1,950 | $23,850 |
| Married filing separately | $14,600 | $1,550 | $16,150 |
| Married filing jointly (with one spouse age 65 or older) | $29,200 | $1,550 | $30,750 |
| Married filing jointly (with both spouses age 65 or older) | $29,200 | $3,100 | $32,300 |
| Qualifying surviving spouse | $29,200 | $1,550 | $30,750 |
Data source: IRS and Jackson Hewitt.
2. Spousal IRA
Let's say you're retired, but your spouse is still working. The IRS allows you to contribute to a spousal IRA (individual retirement account) of your own. For the tax year 2024, the contribution limit on a spousal IRA is $8,000. Any money you contribute belongs to you, even if your spouse brings in the lion's share of income.
There's something very comforting about knowing that you can continue contributing to retirement, even while you're in retirement.
3. Solo 401(k) for small business owners
If you've toyed with the idea of launching a small business in retirement, you now have one more reason to do so. If you or your spouse own a small business without employees, you can contribute to a pre-tax Solo 401(k), regardless of age or how long you've been retired.
Here's how a Solo 401(k) can be a win-win:
- Contributions are made pre-tax, meaning you won't have any taxes due on the funds the year the income is contributed. Taxes only come due when you withdraw the funds.
- Depending on how much money your small business generates, retirees over 50 can contribute up to $76,500 in pre-tax dollars.
- Opening a small business and a Solo 401(k) allows you to use the income you need for retirement expenses and invest the remainder in what may be a very long retirement.
4. Charitable contributions
If you have a traditional IRA, inherited IRA, inactive SEP IRA, or inactive SIMPLE IRA, this tax-saving option may be for you. While you'll have to wait until you're at least 70 1/2 to take full advantage, it's an excellent money-saving strategy to have in your back pocket.
Say you're lucky enough not to need the required minimum distribution (RMD) to pay bills. Thanks to the qualified charitable distribution (QCD), you can transfer up to $105,000 per individual directly to a charitable organization (or spread the $105,000 out among several organizations). If you're married and you and your spouse would both like to take advantage of the QCD, you can each contribute $105,000 from your respective IRAs.
Here's what makes this deal so attractive: QCDs of up to $105,000 may count toward your RMD for the year. In addition, QCDs are not considered taxable income.
5. Medical deductions
Back when you were 25, you probably came nowhere close to spending 7.5% of your adjusted gross income (AGI) on medical expenses. As a retiree, your situation may have changed. If you itemize your deductions, you'll find the list of medically related deductions is quite extensive. It includes:
- Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
- Hospitalization
- Prescription drugs
- Medicare premiums
- Inpatient treatment for alcohol or drug addiction
- Amounts paid for false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, a guide dog or other service animal to help a visually impaired or hearing disabled person, or a person with other physical disabilities, crutches, or wheelchairs
- Transportation for essential medical care
- Weight-loss programs for specific medical issues, including obesity
- Long-term care insurance premiums
- Nursing home care
This list is not comprehensive, but it offers an idea of the variety of medical services that can lead to tax-saving deductions. While 7.5% may be an intimidating percentage of your income, it's not an impossible threshold to reach. For example, if your AGI is $40,000, spending $3,000 on medical expenses means you qualify for the deduction.
As a kid, you might have been surprised to know how much living you'd have left to do once you retired and how many dreams you'd have left to fulfill. And yet, here you are.The beauty of retirement is finally having time to live life to the fullest. But since that requires money, it's good to know there are tax breaks that can help.
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