7 Tax Breaks for Retirees

To itemize medical and insurance expenses, they must both exceed the standard deduction and outstrip 7.5 percent of your adjusted gross income for the year. AGI is that all-important measure of taxable income consisting of wages, dividends, capital gains, and business and retirement income, minus adjustments including self-employment taxes, student loan interest and contributions to traditional IRAs.

The Department of Health and Human Services estimates that an American turning 65 in 2022 will incur $120,900 in future long-term services and support costs over their lifetime. Average annual costs in 2021 ranged from $20,280 (for adult health day care) to $108,405 (for a private room in a nursing home), according to the most recent data from insurer Genworth. The numbers can run well over the standard deduction, so itemizing long-term care insurance premiums and qualified medical and dental expenses (including hospital, nursing home and rehabilitation care, prescription drugs, false teeth, wheelchairs and weight loss and nutrition programs) is worth it.

The spousal IRA

Older taxpayers, including some retirees, can kick extra dollars into a traditional individual retirement account or its Roth cousin. But there’s only one way to do that if you’re retired, and only one of the accounts yields a tax deduction.

To contribute to a traditional or Roth IRA, you generally have to have earned income. In other words, you’re not retired. 

But there’s a loophole: A nonworking spouse can open and contribute to either type of IRA, provided that the other spouse is working and the couple files a joint return.

Traditional IRAs are funded with either pretax or posttax dollars. Only pretax contributions are deductible; after-tax ones aren’t. With pretax accounts, the money grows tax deferred, and you pay ordinary income tax rates on withdrawals, which you have to start making once you reach age 73. With posttax IRAs, you have to carefully document contributions to the IRS to avoid paying tax — again — on withdrawals.

By contrast, Roth plans are funded with after-tax dollars, so there’s no deduction come tax time for contributions. Withdrawals of earnings are free of ordinary income tax and penalties once you hit age 59½ and have had your account for at least five years. Roths don’t have required minimum distributions (RMDs), unless you inherited the account from someone other than a spouse. And you have to have earned income, from wages and the like, to contribute to one.

For tax year 2023, for which returns are now being filed, the contribution limit for those age 50 and older is $6,500, plus a $1,000 catch-up amount for a total of $7,500. Taxpayers have until this year’s April 15 filing deadline to make contributions for 2023. So a nonworking (either retired or stay-at-home) spouse with an account still has time to get a tax deduction.

Credit for the elderly or the disabled

This tax break lets individuals and couples with very low income reduce the amount of income tax they owe. Taxpayers must be 65 or older by the end of 2023, or retired on permanent and total disability and have taxable disability income. The credit, which ranges from $3,750 to $7,500, reduces a tax bill dollar for dollar. It’s nonrefundable, meaning that if it exceeds the amount of tax you owe, you don’t get the remainder as a cash refund. Taxpayers claiming the credit can’t have income at or exceeding $12,500 to $25,000, depending on their marital and filing status.

HSA contributions

The powerful tax beauty of a Health Savings Account, or HSA, is threefold. 

Contributions are made with pretax dollars, which reduces your overall taxable income and thus the taxes you owe. As long as the account’s dollars are used for approved health care expenses, withdrawals are tax free. Some HSAs invest in stocks, mutual funds or exchange-traded funds, and the gains they notch over time are also tax free. It’s a triple-bagger come tax time.

Like with IRAs, you have until April 15 to make a contribution to an HSA. For tax year 2023, individuals can kick in up to $3,850; for family plans, the limit is $7,750. People 55 and older can throw in an extra $1,000.

Still, there are a few catches. 

The accounts are available only through health insurance plans sponsored by employers and through the Affordable Care Act marketplace. The rub is that you have to be enrolled in a high-deductible health plan to contribute to an HSA. This year, such plans have a minimum deductible of $1,600 for individuals and $3,200 for families, and a maximum out-of-pocket limit of $8,050 for single coverage and $16,100 for family coverage. Nearly 3 in 10 covered workers were enrolled in a high-deductible plan in 2021, according to Peterson-KFF Health System Tracker.

An HSA’s pretax contributions lower your adjusted gross income — that all-important measure of taxable income consisting of wages, dividends, capital gains, business and retirement income, minus adjustments including self-employment taxes, student loan interest and contributions to traditional IRAs. That means an HSA account can put a person with steep medical costs closer to the 7.5 percent threshold needed to itemize medical costs not paid through the HSA.

Charitable donations

Distributing funds from your traditional IRA to a charity recognized by the IRS kills several birds with one stone.

A qualified charitable distribution (QCD) counts toward your required minimum distributions (RMDs) that set in once you turn 73. It benefits a nonprofit. And it lowers your taxable income, in turn potentially reducing the taxes owed on Social Security benefits, and Medicare surcharges and keeping you out of a higher tax bracket.

In tax terms, a QCD is an exclusion — meaning an item on which you don’t pay taxes — and not a deduction, which is an item that reduces the total income on which you pay tax.

For a QCD to count toward your current year’s RMD, the money must come out of your IRA by your RMD deadline, typically Dec. 31. Taxpayers can shift out up to $100,000 for tax-free charitable giving for 2023. The threshold for 2024 rises to $105,000. Because QCDs can start at age 70½ — before retirees must take RMDs — doing them earlier can move money from an IRA and help you avoid being pushed into a higher tax bracket once distributions are required. A QCD isn’t deductible, but regardless of when it’s made, it can lower your taxable income.

While a taxpayer can make a QCD from a Roth IRA, there’s no additional tax benefit to doing so, as the accounts are already exempt from tax and distributions aren’t deductible.

Some nonprofits, including private foundations and donor-advised funds, don’t qualify for QCDs. But starting last year, the law known as SECURE 2.0 said that taxpayers could use the distributions to fund a Charitable Remainder UniTrust, charitable remainder annuity trust or charitable gift annuity, up to a maximum one-time sum of $50,000.