Because many retirees live on a fixed income, the Internal Revenue Service offers tax credits to directly reduce or eliminate the income tax retirees owe at the end of the year. Retirees may also qualify for certain tax deductions from the IRS, which lower the amount of their taxable income.
Earned Income Credit
Retirees who are still earning income may qualify for the earned income credit. To claim this credit, you must have earned income from either employment or self-employment. However, you cannot claim this credit if your adjusted gross income exceeds a certain limit. This credit is available to retirees younger than 65, as well as to retirees 65 and older who care for a qualifying child, such as a grandchild. If you meet all requirements, you can claim a credit of up to $5,891, depending on whether you care for any qualifying children.
Child and Dependent Care Credit
If you pay someone to care for a child or dependent so you can work and earn income, you may qualify for the child and dependent care credit. The person receiving the care must either be a child younger than 13, or a spouse or other dependent who lives with you for more than half the year and is incapable of caring for himself. You can claim this credit regardless of your age. If you qualify, you can claim up to 35 percent of the first $3,000 you spend on care, depending on your adjusted gross income.
Retirement Savings Contribution Credit
Even if you are already retired, you can still contributed to a retirement plan. If you make qualifying contributions to a retirement plan during the year, you can claim a credit of up to 50 percent of the amount you contribute, depending on your adjusted gross income. However, if you are receiving distributions from the retirement account, you must subtract from the credit amount all distributions you received from two years before you claimed the credit until the due date of the tax return.
Retirees often qualify to deduct medical and dental expenses, charitable contributions and personal expenses. To qualify for the medical and dental expenses deduction, the total amount of your medical and dental expenses must be greater than 7.5 percent of your adjusted gross income. You can deduct any charitable contributions you make during the year, as long as the recipient was a qualified organization. Finally, if you incur certain personal expenses, such as investment expenses, that exceed 2 percent of your gross income, you can deduct the excess amount.