5 Great Ways to Cut Taxes in Retirement

A higher standard deduction, more room to shelter savings and a break for medical expenses are just a few things that can slash your taxes in retirement.

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They say that with age comes wisdom. But with age also come a few perks that can cut your taxes in retirement.

Once your birthday cake has 50 candles on it, the IRS starts to lighten up a bit. And when you hit 65, the IRS has a few more small presents for you — if you know where to look.

Here are five tax deductions and credits you don’t want to miss after you’ve blown out all those candles.

1. A higher standard deduction

If you take the standard deduction instead of itemizing, you'll be able to deduct the amounts in the table below. Importantly, the standard deduction is higher for those who are over 65 or blind. It's even higher if you're also unmarried and not a surviving spouse.

Filing status

2022 tax year

2023 tax year

Single

$12,950.

$13,850.

Married, filing jointly

$25,900.

$27,700.

Married, filing separately

$12,950.

$13,850.

Head of household

$19,400.

$20,800.

For 2022 tax year, you get to add an additional $1,400 to your standard deduction if you're over 65 or blind; if you're also unmarried and not a surviving spouse, you get to add $1,750. For the 2023 tax year, the amount you can add rises to $1,500 and $1,850, respectively.

2. More room to shelter income

Because contributions to a 401(k) are tax-advantaged, the IRS limits how much you can contribute each year. For folks under 50, that limit is $20,500 in 2022 and $22,500 in 2023. If you’re 50 or older, though, you can put in $27,000 in 2022 and $30,000 in 2023.

But alas, that assumes that you’re still working and that your employer offers a 401(k) plan.

If you’ve already kissed your cubicle goodbye, you may still be able to contribute an extra $1,000 a year to a traditional IRA or a Roth IRA (if you qualify for a Roth). That’s thanks to the IRS's catch-up provision for people 50 and older.


See more ways to save and invest for the future


3. The deduction for medical expenses

If you itemize, you may be able to deduct unreimbursed medical expenses — but only the amount that exceeds 7.5% of your adjusted gross income. For example, if your adjusted gross income is $40,000, the threshold is $3,000, meaning that if you rang up $10,000 in unreimbursed medical bills, you might be able to deduct $7,000 of it from your taxes in retirement.

And if you’ve recently purchased long-term care insurance, you may be able to add in $450 to $5,640 of the premiums in 2022 and $480 to $5,960 in 2023, depending on your age (the older you are, the more you can deduct from your taxes in retirement).

4. A safety net for selling that empty nest

This tax deduction is available to everyone regardless of age, but it’s especially useful if you're itching to sell your house and downsize in retirement. The IRS lets you exclude from your income up to $250,000 of capital gains on the sale of your house. That’s if you’re single; the exclusion rises to $500,000 if you’re married.

So, if you bought that four-bedroom ranch house back in 1984 for $100,000 and sold it for $350,000 today, you likely won’t have to share any of that gain with Uncle Sam. There are a few conditions, though:

  • The house has to have been your primary residence.

  • You must have owned it for at least two years.

  • You have to have lived in the house for two of the five years before the sale, although the period of occupancy doesn’t have to be consecutive. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this, though; see IRS Publication 523 for details.)

  • You haven’t excluded a capital gain from a home sale in the past two years.

  • You didn't buy the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.

  • You aren't subject to expatriate tax.

» Ready to work with a wealth advisor? See which advisors can help with tax and estate planning.

5. More help if you’re disabled

You may qualify for a $3,750 to $7,500 tax credit, depending on your filing status, if you or your spouse retired on permanent and total disability. IRS Publication 524 has all the details.

But be prepared for this one to give you a few gray hairs if you're relying on it to cut your taxes in retirement. First, pensions and Social Security benefits can cause you to exceed the income limits. Plus, the tax credit is nonrefundable, which means that if you owe $250 in taxes but qualify for a $5,000 credit, for example, you won’t get a check from the IRS for $4,750. But at least you'll get to enjoy a $0 tax bill.

  • Federal: $24.95 to $64.95. Free version available for simple returns only.

  • State: $29.95 to $44.95.

  • All filers get access to Xpert Assist for free until April 7.

Promotion: NerdWallet users get 25% off federal and state filing costs.

  • Federal: $39 to $119. Free version available for simple returns only.

  • State: $49 per state.

  • TurboTax Live packages offer review with a tax expert.

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  • Federal: $29.99 to $84.99. Free version available for simple returns only.

  • State: $36.99 per state.

  • Online Assist add-on gets you on-demand tax help.

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