If you are a senior or retired individual, make sure you are aware of and take advantage of the tax deductions available to you. Some of the most significant tax deductions are listed below.
1. Standard Deduction
The basic deduction or itemized personal deductions on IRS Schedule A are available to all taxpayers. If your personal deductions (most notably house mortgage interest, property taxes, charitable contributions, and medical costs) are less than the applicable standard deduction, you should take the standard deduction. The standard deduction was approximately doubled as a result of the Tax Cuts and Jobs Act, which went into effect in 2018. As a result, the standard deduction is claimed by about 90% of all taxpayers, even the elderly. Seniors received a $14,250 tax deduction in 2021 (which climbed to $14,700 in 2022).
Anyone who is 65 or older by the end of the tax year is entitled to a bigger standard deduction than those who are younger. Only if your spouse is over 65 and you file a joint return are you eligible for the greater deduction.
2. Medical and Dental Expenses
For retirees, medical and dental bills are sometimes one of the most significant expenses. If you itemize your personal deductions, you may be able to deduct some of these costs. Health insurance premiums (including Medicare premiums), long-term care insurance premiums, prescription medicines, nursing home care, and most other out-of-pocket healthcare costs fall under this category.
Medical and dental expenses on Schedule A of your tax return are deductible if you itemize your deductions. They are, however, limited to one per year. A taxpayer’s adjusted gross income is limited to 7.5 percent of their total income (AGI). As a result, only expenses that exceed 7.5 percent of a taxpayer’s adjusted gross income (AGI) are deductible. If a person’s adjusted gross income (AGI) is $100,000, only medical and dental expenses above $7,500 (7.5 percent x $100,000 = $7,500) are deductible.
3. Charitable contributions
Many people consider making philanthropic gifts throughout their retirement years. You can deduct up to $300 in charity contributions as an “above the line” deduction without itemizing for 2021 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Up to $600 can be deducted by married taxpayers filing jointly. Contributions over $300/600 are only deductible as itemized deductions and are subject to various restrictions. The “above the line” charity deduction of $300/$600 is set to expire in 2021, thus it will not be accessible until 2022 or later unless Congress extends it.
You can normally deduct the property’s fair market value if you contribute something other than cash to an eligible nonprofit. You may need to make some adjustments if the property’s value has increased. If you donate a car, boat, or airplane, however, your deduction is usually restricted to the gross revenues from the nonprofit organization’s sale of the item. If the donated vehicle’s claimed worth exceeds $500, this regulation applies.
Because charitable contributions are only deductible if you itemize, you may wish to make all of your donations in one year so you may itemize. You could, for example, give a lot of money to charity one year and then do nothing for one or many years after that.
4. Selling your house
People who are retired frequently sell their homes in order to downsize or move into retirement communities. If you’ve lived in your house for a long time, you’re likely to have a lot of equity and will make a lot of money when you sell it. Fortunately, you may be able to avoid paying any taxes on your profits. The profit you make on the sale—up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly—is not taxable if you dwell in your home for at least two out of the five years before selling it.
5. Contributions to a retirement plan
You can still make tax-deductible contributions to retirement plans like IRAs even if you’re retired or semi-retired. Traditional IRAs, Roth IRAs, and 401(k) contributions are all higher for those over 50. Alternatively, you might make a Roth IRA contribution. You’ll have to pay taxes on the money you put in now, but you’ll be tax-free when you retire. As a result, you won’t have to pay taxes on any of the interest or other income from your Roth IRA investments. SEP-IRAs, Simple IRAs, Keogh plans, and solo 401(k) plans with higher contribution limits for people over 55 can also be established by retirees with their own businesses.
6. Expenses incurred in the course of the business
Many retirees continue to work or create new businesses. Some retired employees, for example, work part-time as consultants for former employers and clients. Having a business (whether full-time or part-time) is a fantastic method to save money on taxes. All necessary business expenses, such as business travel, the cost of business equipment such as computers, and the cost of outside or home offices, may be deducted from your business revenue if they’re fair in size. You may be able to deduct a loss from your business from other sources of income, such as retirement income.
7. Tax Credit for the Elderly or Disabled
You can deduct money from the total amount owing to the IRS if you qualify for the tax credit for the elderly or disabled. Deductions, on the other hand, detract from your total taxable income. If the amount deducted exceeds the amount you owe the IRS, you may be eligible for a tax refund. You must be above the age of 65 or permanently disabled to qualify for this credit. Your income cannot exceed specific thresholds, which vary from year to year. If you think you could be eligible for this deduction, consult with your accountant.
8. State Tax Exemptions for Seniors
Seniors are subjected to more than just federal taxes. You may be required to file and pay state income taxes as well. State tax laws differ significantly, and where you live might have a significant impact on your tax liability. Many states provide special tax benefits to elderly, and many do not tax Social Security wages. You’ll be talking about finances, long-term planning, and healthcare if you’re assisting a senior parent with their taxes. So, think about having a chat with your loved one about how they want to spend their retirement. Each year, as your loved one’s needs change, reevaluate this strategy.
Finding the best tax deductions for seniors can be time-consuming, especially because tax season is already stressful. You can reach out to us for more information that will assist you now and as you plan for next year’s budget.
