Capital gains tax for seniors: what you need to know

Summary

How much capital gains tax do seniors pay?

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

However, many retirees may also have other investments that they want to take income from during retirement or sell their homes and downsize to create a lump sum.

Both of these events could raise questions regarding capital gains tax.

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.

Alongside the amount of profit you earned, the 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%.

Let’s say you bought a piece of art for $10,000 and sold it for $50,000 two years later. If your taxable income was $100,000 in 2024, you would pay approximately $6,000 in capital gains tax.

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:

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

Unfortunately, whether you’re 65 or 95, you 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.”

Previously, seniors did have a capital gains tax exemption, known as the over-55 home sale exemption, but this is no longer active.

Do seniors have to pay capital gains tax when selling their homes?

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?

Withdrawals from your retirement accounts, such as your 401(k)s or IRA, are not subject to 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, such as 401(k)s and IRAs.

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 can capital gains tax be avoided for people over 65?

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:

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.

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.

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.

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.