FREE NEWSLETTER
OUR INCOME TAX SYSTEM is based on voluntary compliance. Taxpayers are responsible for reporting all their income and paying the required taxes.
In assessing tax returns, the IRS differentiates between tax avoidance and tax evasion. Tax avoidance is “an action taken to lessen tax liability and maximize after-tax income,” while tax evasion is “the failure to pay or a deliberate underpayment of taxes.”
What are the major sources of tax evasion? Under-reporting income seems to be No. 1. I’ve observed retirees who are supplementing their income by driving for local transportation companies. They only accept cash and don’t provide receipts. I’ve also heard stories about homeowners in our beach town who rent out their vacation properties for cash and don’t declare the income. And I often wonder about local businesses that only accept cash.
Claiming credits or deductions to which you aren’t entitled is another form of tax evasion. I’ve seen retirees try to claim an adult child or elderly parent as a deduction. There’s a process for determining if someone is a legal dependent, and—if so—what deductions or credits are then available. Ken Begley’s excellent article offered some amusing anecdotes about taxpayers’ questionable creativity when it comes to sidestepping taxes.
Meanwhile, tax avoidance is entirely legal. It involves taking advantage of the tax code to minimize your tax bill. The standard deduction is probably the most widely known and used deduction. Itemized deductions, including home mortgage interest, state and local taxes, and charitable contributions, have historically been popular. But the changes enacted by the 2017 Tax Cuts and Jobs Act made these itemized deductions significantly less valuable.
When you stop working, you miss out on some significant tax-avoidance methods available to the average taxpayer. Qualified retirement accounts, like a 401(k) or IRA, require earned income to contribute. Some good news: If one spouse is still working, he or she may be able to contribute to a non-working spouse’s IRA.
On the other hand, there are some advantages to being a senior. Taxpayers receive an enhanced standard deduction if they reach age 65 during the tax year. In 2024, this means an additional $1,550 each for joint filers and $1,950 for single individuals. Lower-income seniors who haven’t reached 65 by the end of the tax year are eligible for the earned income credit, assuming they meet the other criteria. Retirees who provide primary support for eligible dependents may be able to claim the “credit for other dependents,” with a maximum credit of up to $500.
Seniors who work and support children under age 13, or other qualifying dependents, may be eligible for the child and dependent care credit. For example, if you’re unable to care for yourself and need outside care while your spouse is working, you may qualify for this credit. The credit is based on a percentage of your qualified expenses, up to $3,000 for one person and $6,000 for more than one person. The maximum credit for the care of one qualified person is $1,050. The maximum for two or more qualifying people is $2,100. There’s no income cutoff for this credit, but the credit amount is reduced with increasing income.
How else can retirees legally minimize taxes? Here are six ideas.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
I think the tip about “bunching” deductions is under appreciated, from my discussions with friends and family.
my wife and I are charitably inclined and we make 2+ years of charitable gifts every other year. Last year in addition to “normal” giving we put appreciated stock and cash into our Fidelity donor advised fund.
we itemized last year and had about 160% of the standard deduction. Now this year our DAF will send checks to most of the charities that we support, and we’ll take the standard deduction this year.
next year (2025) we will make big donations to our daf again (thx Citigroup stock) and then rinse and repeat.
we are in our mid-60s so I think we have at least 3 more iterations of this process before we switch to qcds from our traditional IRA.
Thanks everyone for the interesting discussion. The tax code is a wondrous thing. In my 6 years of volunteer tax prep I’ve heard so much confusion, misinformation, and opinion. Many folks are sure the rich get all the tax breaks, some think the poor pay no taxes at all, and many think they pay taxes at a much higher rate than they actually do. The changes in 2017 to itemizing deductions and the increased standard deduction still confound many. They are convinced they are getting screwed because they can’t deduct a few $100 dollars of charitable gifts, but they actually are getting much more from the Std Deduction. Individual opinions on taxes are pretty fascinating.