Growing older doesn’t always have to be a bad thing; as the older you get, the more perks you can receive to help cut annual taxes. The following are the top five tax deductions for retirees in California.
1. A Higher Standard Deduction
You will be able to deduct the amounts highlighted in the table below, if you end up selecting the standard deduction instead of itemizing. However, you must note that standard deduction is greater for those who are over the age of 65, are blind, unmarried, and not a surviving spouse.
|Filing Status||2019 Tax Year||2020 Tax Year|
|Married (Filing Jointly)||$24,400||$24,800|
|Married (Filing Separately)||$12,200||$12,400|
|Head of Household||$18,350||$18,650|
2. Retirement Accounts
Since contributions to your 401(k) are tax-advantaged, you can only contribute so much since the IRS has its limitations. If you’re under 50, that limit amounts to $19,500 in 2020. On the other hand, if you are 50 or older, you are able to contribute $26,000 per year. But remember – that assumes that you’re not yet retired, and that your employer still offers a 401(k) plan.
Moreover, if you’ve already said goodbye to your job – don’t fret. You can still contribute an extra $1,000 annually to a traditional IRA or Roth IRA, thanks to the IRS’ catch-up provision for consumers aged 50 and older.
3. Medical Expenses
Further, if you choose to itemize, you have the ability to deduct unreimbursed medical expenses. However, this is only geared towards the amount that exceeds 7.5% of your adjusted gross income.
Example: Say you have an adjusted gross income of $40,000. This means you have a threshold of $3,000, which also means that if you have $10,000 in unreimbursed medical bills, you can potentially deduct $7,000 of those bills from your taxes while in retirement.
Not to mention, you are also able to add in from $430 to $5,430 of the premiums, if you purchased long-term care insurance in the year 2020. This depends on your age, considering the older you are, the more you can possibly deduct from your taxes.
4. Capital Gain Exemptions for Home Sales
When in retirement, it’s usually common to sell your house and downsize. If you ever decide to do so, you should note that tax deduction is incredibly useful, considering the IRS allows you to exclude from your income up to a staggering $250,000 of capital gains on the sale of your home. This figure only counts if you’re single. If you’re married, this exclusion can increase up to $500,000.
Let’s say you purchased a three-bedroom Tuscan villa back in the 80’s for $100,000 – and then, you ended up selling the home for about $350,000. You most likely won’t have to share any of that capital gain with the government. Although, there are a few conditions:
- Your home had to have been your primary residence.
- You must have owned the home for at least two years.
- You had to have lived in your home for two to five years before the sale. Note that the period of occupancy does not have to be consecutive.
- You have not excluded a capital gain from a home sale in the past two years.
- You did not purchase the home through a like-kind exchange in the past five years.
- You are not subject to expatriate tax.
5. Deductions for the Disabled
If you or your spouse is retired on permanent and total disability, it is useful to know that you may be qualified for a $3,750 to $7,500 tax credit – depending on your filing status.
This won’t be a walk through the park, however. If you’re relying on it to cut your taxes in retirement, you should know that pensions as well as Social Security benefits can cause you to exceed the income limits. Additionally, tax credit is nonrefundable – meaning that if you owe $250 in taxes, but qualify for a $5,000 credit, you most likely won’t receive a check from the IRS for $4,750. On the bright side, you’ll get handed a $0 tax bill.