8 Smart Tax Breaks Retirees Can Use to Save More in Retirement

Retirees often face higher tax bills due to limited income streams and a lack of tax planning. Without knowledge of available tax breaks, you might pay more than necessary, cutting into your retirement savings. This guide highlights key tax-saving opportunities for retirees, from Social Security exemptions to strategic retirement account withdrawals, helping you keep more of your hard-earned money in retirement.

Key Takeaways:

Standard Deduction: Higher deduction for those 65+ (2024: $28,500 for couples, $14,250 for singles).
Tax-Free Social Security: Benefits may be untaxed below income thresholds.
Roth Accounts: Tax-free withdrawals from Roth IRAs/401(k)s.
Medical Deductions: Deduct healthcare costs over 7.5% of AGI; use HSAs tax-free.
Pension Exclusion: Some states exempt pension income, especially for military/government retirees.
RMD Strategy: Minimize taxes on Required Minimum Distributions with smart withdrawals.
Capital Gains Break: 0% tax on long-term gains if income is low enough.
State Benefits: States like Florida and Texas don’t tax retirement income.

1. Maximize the standard deduction for retirees

One of the simplest ways to reduce taxable income in retirement is by utilizing the standard deduction. If you’re over 65, the IRS offers a higher deduction compared to younger taxpayers.

For 2023:

Married couples filing jointly: $27,700 (increased by $1,500 per spouse over 65)
Single filers: $13,850 (increased by $1,850 if over 65)

For 2024 (estimated):

Married couples filing jointly: The standard deduction is expected to increase to around $28,500. If either you or your spouse is over 65, the deduction may increase by approximately $1,500 per person.
Single filers: The standard deduction is expected to rise to about $14,250. If you’re 65

By claiming this deduction, you lower the amount of income subject to taxation, potentially reducing your overall tax bill.

2. Take advantage of tax-free social security benefits

Not all Social Security benefits are taxed. The taxability of your Social Security income depends on your combined income (adjusted gross income, nontaxable interest, and half of your Social Security benefits). Here’s how the tax rate breaks down:

If combined income is under $25,000 (single) or $32,000 (married), Social Security is not taxable.
Income between $25,000–34,000 (single) or $32,000–44,000 (married) may tax up to 50% of benefits.
Income over $34,000 (single) or $44,000 (married) may tax up to 85% of benefits.

Being strategic about withdrawals from other retirement accounts can help reduce taxes on your Social Security benefits.

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3. Tax-exempt Roth IRAs & Roth 401(k)s

Retirees can take advantage of Roth IRAs and Roth 401(k)s for tax-free withdrawals in retirement, provided you meet the necessary conditions:

Roth IRA: Tax-free withdrawals after age 59½ and at least 5 years in the account.
Roth 401(k): Similar benefits, but check your plan for specific conditions.

This strategy ensures that your retirement income is predictable, tax-free, and reduces your taxable income in retirement.

4. Deduct medical expenses

Healthcare costs typically rise with age, but retirees can deduct some of these expenses if they exceed 7.5% of your adjusted gross income (AGI). This includes:

Medicare premiums

Long-term care insurance

Prescription medications

Other out-of-pocket medical expenses

Additionally, Health Savings Accounts (HSAs) allow tax-free withdrawals for qualified medical expenses after age 65, making healthcare costs more manageable in retirement.

5. Exclusion of pension income for tax breaks

Many states offer exclusions or credits on pension income, especially for military and government employees. Some states fully exempt pension income from state income taxes, significantly reducing tax liability. For example:

Military pensions: Many states exempt military pensions from state taxes or offer significant deductions.
State-specific exclusions: Check with your state’s tax agency to understand whether your pension income is tax-exempt.

This can be a huge tax break if your pension is a significant part of your retirement income.

6. Managing Required Minimum Distributions (RMDs)

At age 73, retirees must begin taking Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s. These withdrawals are taxed as ordinary income, but there are ways to minimize the impact:

Strategic RMD withdrawals: Spread withdrawals over several years to stay in a lower tax bracket.
Charitable Giving: Use Qualified Charitable Distributions (QCDs) to donate directly from your IRA, satisfying your RMD while avoiding taxable income.

These strategies help manage the tax impact of RMDs and keep your retirement income tax-efficient.

7. Capital Gains tax breaks

Retirees may benefit from long-term capital gains tax breaks on investments like stocks, bonds, and real estate. If you’ve held an asset for over a year, your profit may be taxed at a lower rate than ordinary income. The tax rates are:

0% if your taxable income is below $44,625 (single) or $89,250 (married).
15% or 20% for higher income brackets.

Utilizing these tax breaks on your investments allows your savings to grow while minimizing taxes in retirement.

8. State-specific retirement tax breaks

Beyond federal tax breaks, many states offer their own set of retirement tax benefits. Here’s a quick overview:

States without income tax: Florida, Texas, and Nevada don’t tax retirement income, so you keep more of your money.
Senior property tax relief: Some states provide property tax exemptions or reductions for retirees.
Partial retirement income exemptions: States like Pennsylvania and New York offer partial exemptions on retirement income.

Be sure to check your state’s tax laws to maximize these local benefits.

Frequently Asked Questions

Do retired people have to file taxes?

Yes, retirees may still need to file taxes if their combined income exceeds the filing threshold, or if they’re taking required minimum distributions (RMDs) that push them above the threshold. Always consult the IRS guidelines based on your income.

Do all states tax retirement income?

No, some states, such as Florida and Texas, do not impose a state income tax, meaning retirees can keep all their income. Other states, like California and New Jersey, tax Social Security, pensions, and retirement income.

How do I reduce taxes on my retirement income?

Reduce taxes by maximizing tax-advantaged accounts, delaying Social Security benefits, strategically withdrawing from retirement accounts, and taking advantage of deductions like healthcare or charitable giving.

How do I plan for taxes in retirement?

To plan for taxes, estimate your total retirement income, work with a tax professional, and develop strategies for minimizing taxes, including managing RMDs and considering tax-efficient withdrawals from retirement accounts.

Maximize your tax breaks in retirement

With proactive tax planning, retirees can significantly reduce their tax liability, leaving more money for living expenses, travel, and enjoyment. By understanding the tax implications of Social Security, Roth IRAs, RMDs, and state-specific tax breaks, you can make the most of your retirement income and save more throughout your retirement years.

Plan ahead, stay informed, and use these tax breaks to maximize your savings and enjoy a more comfortable retirement.