Larry Silverman, CPA, CFP®
If you are a senior or retired, understand and take advantage of the deductions available to reduce your income taxes each year. Below are some of the most important deductions.
- Medical and dental expenses. Fortunately, some of these expenses are deductible for retirees. Deductions include health insurance premiums, including Medicare, long-term health insurance premiums, prescription drugs, nursing home care, and most other out-of-pocket medical care costs. Under current rules, medical and dental expenses in excess of 10% of a taxpayer’s adjusted gross income (AGI) are deductible. Those who are 65 or older before January 1, 2017 can follow the rule that was in effect until 2013 where expenses in excess of 7.5% of the AGI are deductible.
- Selling your house.If you choose to sell your home to downsize or move into a retirement community, you may not have to pay tax on your profit. As long as you have lived in your home for at least two out of the five years prior to selling, the profit from the sale is not taxable, up to $250,000 for single and $500,000 for married taxpayers filing jointly.
- Retirement plan contributions.Retired or semi-retired people can still make contributions to retirement plans such as IRAs. Taxpayers over 50 have higher contribution limits for traditional IRAs, Roth IRAs, and 401(k)s than younger people. Of particular interest is the Roth IRA, which is different than other IRAs in that you pay taxes on the income you contribute now, but withdrawals upon retirement are tax-free. This means no tax is paid on interest or other income earned by the Roth IRA investment.
- Investment income.Interest, dividends, and capital gains from investments are good ways to earn money when retired. These types of income are not subject to Social Security or Medicare taxes, unlike income from a job or business. Dividends and capital gains are taxed at lower rates than ordinary income, ranging from 0% to 20% depending on your overall income tax bracket. In addition, utilization of tax free municipal bonds is a great way to generate non-taxable income.
- Charitable contributions.Many people like to give back to their community during retirement. Charitable contributions of up to 50% of your adjusted gross income are deductible each year as an itemized deduction.
- Standard deduction. Taxpayers 65 and older by December 31 of the tax year are entitled to a higher standard deduction. This applies if you don’t itemize your deductions; many older folks stop itemizing if they are no longer paying mortgage interest. You can even claim the higher deduction if only your spouse is older than 65 and you file a joint return.
Find a knowledgeable and trusted advisor to help you wade through the myriad of tax information to ensure you are taking all the deductions to which you are entitled.