Capital gains tax exemption for seniors: what does it mean for you? (2024)

But what about retirement accounts and Social Security income? Are there still tax advantages to be had for seniors?

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

Since the tax break for over 55s selling property was dropped in 1997, there is no capital gains tax exemption for seniors. This means right now, the law doesn’t allow for any exemptions based on your age.

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’.

The Taxpayer Relief Act of 1997 increased the range of capital gains exemptions available to homeowners so that it was no longer about age. However, these exemptions only apply to investment properties and not to your main residence. Over the years, capital gains tax law has evolved to make things easier for homeowners in every age group.

Capital gains tax for seniors: what you need to know

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

A retirement account is based on capital gains because you sell assets through your 401(k), IRA, or similar portfolio. It’s also common for seniors to sell their homes and downsize, to create a lump sum.

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

Getting good financial advice means making life-changing decisions about your money becomes easier. Why not find your best financial advisor and get a free first consultation below

To get started, let's take a look at some of the most common questions around capital gains exemption for seniors.

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 tax in certain situations. These apply to all age groups, not just those over 65.

One of these is when selling your home.

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 front-end tax-advantaged, so you pay no tax on the money you invest. 401(k)s and traditional IRAs are the most common form of these accounts.

Then there are back-end tax-advantaged retirement accounts, which do 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 it. The best-known back-end retirement accounts are Roth IRAs. Here, you’ve already paid your taxes up front in the past, so now you’re tax-free.

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 made the investment.

  • The most common forms are 401(k)s and 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, are a kind of capital gains tax relief strategy for retirees.

  • There are not any other age-related exemptions in the tax code currently.

Speak to an expert financial advisor

The IRS allows no specific tax exemptions for seniors – either on income or capital gains.

As discussed, a back-end 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.

Capital gains tax exemption for seniors: what does it mean for you? (2024)

FAQs

Do senior citizens get a tax break on capital gains? ›

Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.

What is the capital gains tax for a retired person? ›

The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.

How does the one time capital gains exemption work? ›

You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years. But it can, in effect, render the capital gains tax moot.

What is the retirement exemption for capital gains? ›

What is the CGT Retirement Exemption? The CGT Retirement Exemption allows capital gains of up to $500,000 resulting from the sale of an active asset to be exempt for capital gains tax purposes. In order to apply the CGT Retirement Exemption, the asset sold needs to meet the definition of an active asset.

How to avoid capital gains tax over 65? ›

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.

What are the two rules of exclusion on capital gains for homeowners? ›

Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.

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