Ten ways seniors can limit the impact of taxes in retirement

For most people in their retirement years, every penny counts. But a huge number of those pennies can end up going to Uncle Sam, which is why it’s important for older Americans and their families to understand as much as they can about the tax liabilities people still face even when they are seniors.

After all, while you need to pay taxes, there’s no reason to pay more than what you legitimately owe. Plus, it’s difficult to budget and know how much you have to live on if you’re at risk of suddenly facing a high tax bill.

Here are 10 ways seniors can limit the impact of taxes taking a bite out of their retirement:

Social Security. Depending on total income and filing status, people can owe taxes on as much as 50 to 85 percent of Social Security benefits. Any income earned up to $19,560 would not trigger Social Security taxation.

Medicare Premiums. If a person is self-employed and not eligible to receive group coverage, premiums paid for Medicare Part B and D, Medigap or Medicare Advantage plans are tax deductible.

Retirement Accounts. Contributions to an IRA or 401(k) can be either pre-tax or tax-deductible. Once a person begins withdrawing money, they only pay tax on what is taken out as income, and in the case of a Roth IRA they will pay no taxes on withdrawals.

Investment Income. After the age of 65, income in the form of investment dividends, interest or capital gains is taxed at a lower rate of 15 percent and is exempt from Social Security or Medicare taxes.

Sale of a Home. A person who has lived in their home for at least two of the last five years prior to its sale will not pay capital gains taxes on profits up to $250,000 as an individual or $500,000 as a married couple.

Long-Term Care Expenses. Nursing home, home care, assisted living, and memory care expenses, as well as premiums for qualified long-term care insurance policies, can be deducted.

Charitable Contributions. Deductions for cash contributions can be taken for up to 60% of Adjusted Gross Income (AGI), and donations of property such as a vehicle or property can be deducted at the fair market value of the asset.

Family Gifting. Individuals can gift money to family members on an annual basis. As of 2022, the annual gifting limit is $16,000 to each family member, and your spouse can gift another $16,000 to each of those same family members.

Loans and a Reverse Mortgage. Because the funds received from a loan or a reverse mortgage are borrowed and not income, they are not subject to taxes.

Life Settlements. If the owner of a life insurance policy is diagnosed with chronic health conditions (two activities of daily living or more) or terminal conditions (two years or less of life expectancy) the funds received from the sale (life settlement) of their policy can be exempt from federal taxes. Also, any funds received at or below the premiums paid are exempt from taxation.

Knowing these things, and more, about how taxes work for seniors is critical so you can limit their impact and make accurate financial decisions. You simply can’t create a workable budget for your household if you fail to account for the impact of taxes.

Seniors should consult a tax professional who can help navigate the twists and turns of all the IRS rules, as well as point out these potential deductions that could be available to you depending on your individual situation.

They say knowledge is power – and when it comes to seniors and taxes, it’s also the way to make sure you keep every penny you can so you can continue to thrive as you age.


About Chris Orestis
Chris Orestis, CSA, president of Retirement Genius (www.retirementgenius.com), is a retirement and long-term care planning expert, senior issues advocate, and author. Orestis, who has more than 25 years’ experience in the insurance and long-term care industries, also created the use of life settlements for long-term care purposes. Known as a political insider and senior issues advocate, Orestis is a former Washington, D.C., lobbyist who has worked in both the White House and for the Senate Majority Leader on Capitol Hill. In 2007 he founded Life Care Funding, and in 2017 he founded the LifeCare Xchange. Chris Orestis is author of the books “Help on the Way” and “A Survival Guide to Aging.” A third book, “Retire Like a Genius,” is in the works. He has been speaking for two-decades across the country about senior finance and the secrets to aging with financial and physical health and dignity. In 2019, Chris was named one of the 20 most innovative people in the life insurance industry by the National Association of Independent Life Brokerage Agencies. He has appeared in The New York Times, The Wall Street Journal, CNBC, NBC News, Fox News, USA Today, Kiplinger’s, Investor’s Business Daily, AARP, PBS and numerous other media outlets, is a frequent columnist for NewsMax Finance, Broker World, ThinkAdvisor, IRIS and has been a guest expert on more than 50 radio programs and TV appearances.