No one likes to spend more money than they have to. And saving as much as you can becomes increasingly important as you approach retirement.
Thankfully, there are a few strategies you can use to lower your tax bill, eliminate money stress, and keep more of your cash when you’re living on a fixed income. Here are some of our favorites.
Increase your standard deduction
Move aside, senior discounts. The IRS has a bigger savings scheme in store for retirees, and it comes in the form of a heftier standard deduction amount.
While your less-seasoned counterparts are limited to standard deductions in the $12,950 to $25,900 range for the 2022 tax year, taxpayers over the age of 65 can increase their standard deduction by an additional $1,400 to $2,800.
How much larger your standard deduction becomes depends on your filing status and, if you’re married, on your spouse’s age. Still, you save several hundred dollars on your taxes without having to lift a finger.
Deduct your Medicare premiums
Just because you’re retired doesn’t mean you have to stop working if you don’t want to. Many retirees turn to self-employment or look for other ways to earn extra income — and qualify for more tax deductions.
One such deduction lets self-employed retirees deduct up to 100% of their Medicare Part B and Part D premiums, in addition to what they’ve paid toward other qualifying medical expenses.
It’s important to note, though, that you won’t be eligible for this deduction if you could be covered by a spouse’s health insurance plan or by an employer-sponsored plan.
Keep contributing to an IRA
Did you know that you can continue to save for retirement while in retirement? If you’re self-employed, you can funnel up to $61,000 of your earnings into an SEP IRA for the 2022 tax year. Similarly, if you go back to work for another employer and you’re over the age of 50, you can contribute up to $7,000 to a traditional or Roth IRA.
Your spouse can contribute to an IRA on your behalf, too, even if you’re not employed. Say, for example, that you and your partner file a joint return, you retire first, and you don’t want to find another job (after all, who could blame you?).
Your still-working spouse can contribute up to $14,000 into your respective IRAs, sheltering more of your money from those dreaded income taxes and further padding your nest egg for a cushier retirement.
Leverage catch-up contributions
If you have a 401(k), you can also increase your annual contributions when you reach age 50. For the 2022 tax year, you can add an additional $6,500 to your 401(k), bringing your total maximum contribution amount to $27,000.
The tax benefit here is that you’re contributing to your 401(k) with pre-tax dollars. You won’t pay income taxes on those contributions until you start taking distributions. If you’re in a lower tax bracket when you retire, your withdrawals will be taxed at that lower rate.
In other words, you’ll pay less in income taxes during the years you contribute to your 401(k) — and you might continue paying less in income taxes throughout your retirement.
Take the saver’s credit
If you decide to make ongoing or increased contributions to your retirement accounts, make sure you look into the saver’s credit. If you’re eligible, you may be able to deduct some of those contributions on your taxes, further reducing your tax liability.
The maximum credit amount is $1,000 for single filers and $2,000 for married couples filing jointly, but that’s still a four-figure tax saving. How much of that amount you receive depends on your income, filing status, and whether or not you’re actively receiving retirement distributions.
Pro tip: If you’re not sure if you’ll qualify for the saver’s credit, work with an accountant or use one of the best tax software options to get started.
Reduce what you pay in capital gains taxes
Downsizing or selling your home? There’s a capital gains tax exclusion worth up to $500,000 with your name on it.
Typically, you pay capital gains taxes when you profit from the sale of an asset, including real estate. The IRS offers a workaround for this, however.
If the property you’re selling served as your primary residence for at least two of the last five years, you might be eligible for this tax exclusion. Single filers can offset up to $250,000 in capital gains taxes in 2022, while married couples filing jointly can exclude up to $500,000.
Pro tip: You can save even more on your living expenses by renting and using some of these creative ways to help pay your rent.
Contribute more to your HSA
If you’ll be at least 55 years old by the end of the tax year, you can increase your health savings account (HSA) contributions by an extra $1,000.
During the 2022 tax year, you’d be able to contribute up to $4,650 to a self-only HSA plan. If you’re married and at least one of you is covered by an HSA, you could contribute up to $9,300.
You won’t pay taxes when you withdraw those funds later, as long as you use them to pay for qualifying medical expenses.
Keep in mind, however, that you’re no longer eligible to contribute to an HSA once you sign up for Medicare, so time your contributions wisely.
Claim the Credit for the Elderly or the Disabled
One of the IRS’s many well-kept secrets is a tax credit specifically for seniors and people with disabilities. To claim this credit, you either need to be 65 or older by the end of the tax year or, if you’re under age 65, you need to have retired on permanent and total disability and receive taxable disability income.
You’ll also need to meet income limits, which vary based on your filing status and the amount of your nontaxable income you receive from sources like Social Security and annuities.
While there are quite a few eligibility factors to consider, the Credit for the Elderly or the Disabled can be worth anywhere from $3,750 to $7,500, so it’s certainly worth exploring.
When you’re living on a fixed income, taking advantage of special tax credits and deductions can help you pay less in taxes and stretch your retirement earnings.
It’s not enough just to know what these tax breaks are, however. You also need to know when and how to apply them.
You’ll want to consider how these tax-saving tactics fit in with your overall tax strategy and plan accordingly. And if you don’t have a tax strategy, now’s the time to put one in place. Let this tax blueprint guide your financial decisions to maximize your money and keep your tax bill as low as possible.