Advertiser Disclosure

5 Great Ways to Cut Taxes in Retirement for 2020

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.
Sept. 24, 2020
Income Taxes, Personal Taxes, Retirement Planning, Taxes
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

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 and want lower taxes in retirement.

1. A higher standard deduction

If you take the standard deduction instead of itemizing (learn how to decide here), you’ll be able to deduct the amounts in the table below. But the standard deduction is higher for those who are over 65 or blind. It’s higher if also unmarried and not a surviving spouse.

Filing status2019 tax year2020 tax year
Single$12,200$12,400
Married, filing jointly$24,400$24,800
Married, filing separately$12,200$12,400
Head of household$18,350$18,650

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 $19,500 in 2020. If you’re 50 or older, though, you can put in $26,000 per year.

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’ catch-up provision for people 50 and older.

» MORE: Learn how IRAs work and the different types


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 $430 to $5,430 of the premiums in 2020, depending on your age (the older you are, the more you can deduct from your taxes in retirement).

» MORE: How to claim the medical expenses deduction

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.

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.


 

This form will put you in touch with an advisor at Facet Wealth, a fee-only, fiduciary online planning firm. They aren’t tax preparers, but they can help you with tax and estate planning.

Working with a CFP is easier than ever before

Facet Wealth, an award-winning next-generation financial planning service, matches you with a CFP® professional so you can get the reliable, high-quality financial advice you need.

Complete the form below and NerdWallet will share your information with Facet Wealth so they can contact you.

By supplying your phone number above and clicking the “Take the first step“ button, you are agreeing that Facet Wealth and NerdWallet may call or text you about financial planning services at the phone number provided above using an automatic dialing system, even if your phone number appears on a state or national Do Not Call Registry or List. Your consent to receive calls/texts is not a condition of purchase.

Powered by

×

Get excited!
You're taking a step towards owning your financial future.

You are being referred to Facet Wealth, INC.’s website ("Facet Wealth") by NerdWallet, Inc., a solicitor of Facet Wealth ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Facet Wealth if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $1,500. You will not be charged any fee or incur any additional costs for being referred to Facet Wealth by the Solicitor. The Solicitor may promote and/or may advertise Facet Wealth’s investment adviser services and may offer independent analysis and reviews of Facet Wealth’s services. Facet Wealth and the Solicitor are not under common ownership or otherwise related entities.Additional information about Facet Wealth is contained in its Form ADV Part 2A available here.