The U.S. and Arizona tax codes are extraordinarily complex, with hundreds of potential deductions and credits available to taxpayers. Which strategies will be most impactful varies significantly depending on where you are in life, your income, and your expenses.
Retirees, particularly those with substantial income and assets, can be in an enviable position thanks to the many provisions in state and federal tax law designed to alleviate the tax burden for older Americans. The downside to qualifying for so many state and federal deductions and credits is the complexity it adds to the filing process.
Tax planning is one of the many services Fullerton Financial Planning offers Phoenix, Peoria, Scottsdale, and Tempe retirees. You can learn more about your tax planning options by calling us at (623) 974-0300 to schedule a meeting.
The Standard Deduction for Seniors
Retirees aged 65 or older are eligible for a higher standard deduction. For the 2024 tax year, this amounts to an additional $1,550 for married individuals filing jointly or separately and $1,950 for single or head of household filers. The additional deduction is increasing to $1,600 for married individuals filing jointly or separately and $2,000 for single or head of household senior taxpayers for the 2025 tax year.
Although this extra deduction is generous and can reduce taxable income substantially for seniors who don’t itemize, many seniors enjoy greater savings by taking a more nuanced approach to deductions.
Medical and Dental Expense Deductions
Health care often represents the largest expense for retirees in the Phoenix area. Qualifying medical expenses can be partially deducted if they exceed 7.5 percent of adjusted gross income (AGI). Some examples of eligible expenses include:
· Health insurance premiums, including Medicare
· Long-term care insurance premiums (up to age-based limits)
· Prescription medications and medical devices
· Out-of-pocket expenses for medical treatments and therapies
Charitable Contributions
Charitable contributions are popular deductions for many retirees who are seeking to maximize their deductions. These contributions do not necessarily have to be in cash form. Assets such as stocks, mutual funds, or real estate can be donated directly to eligible charities for a deduction based on the fair market value of the asset.
Donors can avoid capital gains taxes on appreciated assets by donating them rather than selling them. Charities typically provide a written acknowledgment for tax purposes, but you should also keep your own records of charitable giving throughout the year.
In the case of non-cash donations exceeding $500, you will need to file IRS Form 8283 to report the contribution. For non-cash donations over $5,000, a qualified appraisal is also required to substantiate the value of the gift.
Be sure to consult with a tax professional to ensure compliance and maximize the benefits of your donation.
Qualified Charitable Distributions (QCDs)
Retirees aged 70½ or older can make QCDs directly from their IRAs to eligible charities. These distributions, up to $100,000 annually per person, count toward required minimum distributions (RMDs) and are excluded from taxable income, providing a dual benefit. For married couples where both spouses are over 70½ years of age, this allows for a combined contribution of up to $200,000 annually.
Section 121 Home Sale Exclusion
If you sell a primary residence, you can exclude up to $250,000 ($500,000 for married couples) of capital gains from taxation, provided you meet ownership and use requirements. This is especially beneficial for empty nesters or retirees who are downsizing or relocating.
Credit for the Elderly or Disabled
Low- to moderate-income retirees aged 65 or older and those who are permanently disabled may qualify for this credit. Eligibility depends on income thresholds and nontaxable Social Security benefits.
State and Local Tax (SALT) Deduction
Retirees in Arizona can deduct up to $10,000 in state and local taxes, including property taxes and Arizona state income taxes, when they itemize. Retirees may also be able to leverage Arizona tax credits, such as the Arizona Charitable Tax Credit, to further reduce their state tax liability.
Mortgage Interest Deduction
Retirees with a mortgage on a primary or secondary home can deduct interest payments, subject to loan size limits. This deduction can be particularly valuable for retirees with substantial real estate holdings.
Educational Tax Benefits
Individuals paying for a qualifying dependent’s education can potentially claim the Lifetime Learning Credit (up to $2,000 annually) or deductions for qualified tuition expenses.
There are strict requirements for claiming an adult as a tax dependent. They need to either be under the age of 19 or under the age of 24 and have been a full-time student for at least five months of the tax year.
A grandparent paying for their grandchild’s tuition typically cannot claim this credit unless the grandchild qualifies as a dependent. You could allow your son or daughter to claim the LLC, provided they meet the eligibility requirements and claim your grandchild as a dependent.
Foreign Tax Credit
Retirees with foreign investments or income from abroad can claim a foreign tax credit to offset taxes paid to other countries, avoiding double taxation. Determining which foreign taxes qualify can be complex. Retirees who wish to use this credit often benefit from professional assistance.
Tax Preparation Can Become More Complex as You Age
One of the reasons people look forward to retirement is the simpler, slower pace of life. Although many aspects of your lifestyle may become less stressful, taxes are unlikely to be one of them.
Households with significant assets and a desire to minimize their tax burden may have significantly more complex tax filings in retirement.
Fullerton Financial Planning is here to help. Our tax planning and preparation professionals and financial advisors are committed to staying up to date on changes to federal and Arizona tax law. We’re familiar with all types of retirement tax strategies and can help you pursue the ideal tax plan to maximize the positive impact of available tax deductions and credits.
Call us at (623) 974-0300 to schedule a meeting to discuss your options.
