Capital gains tax for over 65s

1 min readLast updated June 6, 2024by Rachel Carey

This article will take you through everything you need to know about any potential capital gains tax breaks for seniors.

Summary

  • Right now, the law doesn’t allow for any exemptions from capital gains tax based on your age.

  • However, there are ways to reduce your capital gains tax liability when it comes to selling your home.

  • Some retirement accounts provide tax advantages, which could offer some tax relief for seniors.   

  • Speaking to a financial advisor helps you navigate complex tax rules and make the most of your retirement savings.

How much capital gains tax do you pay?

Capital gains are the profits you make by selling an investment asset – the difference between the price you originally paid and any increase that has accrued at the point of sale.

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Alongside the amount of profit you earned, the amount of capital gains tax you pay also depends on how long you owned the item before selling it, your taxable income and your filing status.

Capital gains can be either short-term or long-term. Short-term capital gains are taxed according to ordinary income tax brackets, which range from 10% to 37%. Long-term capital gains are taxed at 0%, 15%, or 20%.

Capital gains tax calculator 2024
Calculate your tax liability with our handy capital gains tax calculator

Match with a financial advisor and get help with your capital gains tax

Working with a financial professional is often the best option for dealing with complicated tax returns and developing a strategy to reduce overall tax liability.

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Capital gains tax for seniors: what you need to know

The majority of retired people generate income from retirement accounts and Social Security payments.

Retirement accounts involve buying and selling investment securities through a 401(k), IRA, or similar portfolio. It’s also common for seniors to sell their homes and downsize to create a lump sum. Both of these could raise questions regarding capital gains tax.

Navigating your finances as you approach retirement can be challenging, especially when you don’t know what is the right choice to make.

To get started, let's examine some of the most common questions about capital gains exemption for seniors.

Capital gains tax over 65: does your age affect how much you pay?

Whether you’re 65 or 95, seniors must pay capital gains tax where it’s due.

This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”

What is the over-55 home sale exemption?

The over-55 home sale exemption was a tax law that allowed over 55s to claim a one-time capital gains tax exclusion on the sale of their home.

Here, over-55s could exclude up to $125,000 of capital gain on the sale of their home.

However, since this tax break was dropped in 1997, there is no capital gains tax exemption specifically for seniors. This means right now, the law doesn’t allow for any exemptions based on your age.

The Taxpayer Relief Act of 1997 increased the range of capital gains exemptions available to homeowners so that it was no longer about age. Now, all homeowners, regardless of age, can exclude up to $500,000 of capital gains when selling their houses.

Over the years, capital gains tax law has evolved to make things easier for homeowners in every age group.

Is there a one-time capital gains exemption for seniors?

While there is no capital gain tax exemption for seniors, there are legal ways to avoid paying taxes in certain situations. These apply to all age groups, not just those over 65.

One of these is capital gains tax on the sale of your property.

If you are selling your primary residence and your tax filing is single, you can avoid paying capital gains tax on the first $250,000 of your profits. If your tax filing is married and filing jointing, your threshold for avoiding capital gain rises to $500,000.

However, this exemption is only available every two years.

Is my retirement account exempt from capital gains tax?

The IRS encourages you to save for retirement by allowing tax deductions on certain retirement accounts.

These tend to be pre-tax advantaged, so you pay no tax on the money you invest and only pay tax once you withdraw your money. 401(k)s and traditional IRAs are the most common form of these accounts.

Then, there are after-tax advantaged retirement accounts, which create a kind of capital gains exemption for retirees.

Here, you put money in that you have already paid tax on, and when you withdraw money later in life, you pay no more tax on the contributions or the profit earned on them.

Roth IRAs are the best-known example of this type of retirement account. Here, you’ve already paid your taxes up front in the past, so now you’re tax-free.

How to avoid capital gains tax for over 65s?

When you retire, it is crucial to ensure you have enough money saved. For most people, a sizeable tax bill could threaten their savings.

Thankfully, there are ways you can protect yourself and your retirement by reducing the amount of capital gains tax you pay:

  • Use capital losses

Capital losses can be used to offset capital gains.

If your capital losses are greater than your capital gains, you can use up to $3,000 of this loss to reduce the amount of tax that you pay in one year.

If your losses are higher than this threshold, you can carry them forward to the next tax year.

  • Create an estate plan

Estate planning is an important part of planning your future. So, once you reach 65, you should have or be drafting a comprehensive estate plan.  

Included in this plan, you should detail whom you want to give your assets to and make your wishes legally binding. This has a capital gains advantage.

No beneficiaries will pay capital gains tax on any assets passed to them if they decide to sell them straight away. If they choose to let them grow and then sell, they will only pay capital gains tax on the appreciation that has taken place since they inherited the assets.

  • Consider relocating

While the federal government takes capital gains tax across the country, some states also implement the tax.

However, eight states do not tax capital gains, meaning you would not have to pay twice.

If you’re considering relocating for retirement, moving to one of the following states would mean you wouldn’t incur state capital gains tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming.

Capital gains and retirement accounts: rules and facts at a glance

Here are some things to remember when it comes to your retirement account and capital gains tax:

  • With front-end retirement accounts, the IRS allows you to deduct money that you’ve invested from your income taxes during the year in which you invested.

  • The most common forms are 401(k)s and traditional IRAs.

  • With back-end retirement accounts, you invest money you have already paid tax. When you withdraw the money, you pay no tax.

  • Back-end retirement accounts, such as the Roth IRA, act as a type of capital gains tax relief strategy for retirees.

  • There are currently no other age-related exemptions in the tax code.

Get expert financial advice

The IRS allows no specific tax exemptions for seniors on capital gains.

As discussed, an after-tax advantaged retirement account, like the Roth IRA, is really as close as you can get.

Taxation is a notoriously complex field, and your best bet is to talk to a professional financial advisor who can give you detailed personal guidance on any deductions, credits, or exemptions you could exploit.

Let Unbiased connect you with an SEC-regulated financial advisor in as little as 48 hours.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.

Need help with capital gains tax?

Find a financial advisor who can help you navigate complex tax rules.