Tax Deductions for Seniors
It’s that time of the year; the flowers are blooming,
temperatures are rising and taxes are due. While that is something we all deign
to do, we must face the music. But, if you’re a senior or retired, be sure you
understand and take advantage of all of the deductions available to you. Read
on below to learn about some important tax information that could be very
helpful for you this season.
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Nolo[1]
wants to make sure that you get the most out of your taxes this season. Keep
reading below to find out about some possibly very valuable deductions to help
reduce your income this year. Be sure to talk with a tax professional to see if
these apply to you.
1. Standard
deduction. Every taxpayer can either take the standard deduction or
itemize his or her personal deductions on IRS Schedule A. You should take the
standard deduction if your personal deductions (primarily home mortgage
interest, real estate taxes, charitable contributions, and medical expenses)
are less than the applicable standard deduction. The Tax Cuts and Jobs Act, the
massive tax reform law that took effect in 2018, roughly doubled the standard
deduction. As a result, about 90% of all taxpayers, including the elderly, will
take the standard deduction. Anyone 65 and older by December 31 of the tax year
is entitled to a higher standard deduction than younger folks. You can claim
the higher deduction only if your spouse is older than 65 and you file a joint
return.
2. Medical and
dental expenses. Medical and dental expenses are often one of the
largest expenses for retired people. Fortunately, some of these expenses are
deductible if you itemize your personal deductions. These include health
insurance premiums (including Medicare premiums), long-term care insurance
premiums, prescription drugs, nursing home care, and most other out-of-pocket
heath care expenses. If you itemize your deductions, medical and dental
expenses are deductible from your income taxes on Schedule A of your tax
return. However, they are subject to a limit. For 2018, the limit is 7.5% of a
taxpayer's adjusted gross income (AGI), meaning that only those expenses in
excess of 7.5% of a taxpayer's AGI are deductible. For example, if someone's
2018 AGI is $100,000, only those medical and dental expenses above $7,500 (7.5%
x $100,000 = $7,500) would be deductible. The rules for deducting medical and
dental expenses change starting in 2019. For that year and later, only medical
and dental expenses in excess of 10% of a taxpayer's AGI are deductible. To
learn more, see Nolo's article Deducting Medical Expenses and IRS Publication
554, Tax Guide for Seniors (available on the IRS website).
3. Charitable
contributions. Retirement is a time many people think about giving back
to their community by making charitable contributions. Such contributions are
deductible as itemized deductions; however, they are subject to special
limitations. Cash contributions of up to 60% of your adjusted gross income are
deductible each year as an itemized deduction. If you donate property other
than cash to a qualified organization, you may generally deduct the fair market
value of the property. If the property has appreciated in value, however, you
may have to make some adjustments. However, if you donate a car, boat, or
airplane, your deduction generally is limited to the gross proceeds from its
sale by the charitable organization. This rule applies if the claimed value of
the donated vehicle is more than $500. Because charitable contributions are
only deductible if you itemize, you may wish to bunch your contributions into a
single year so that you have enough personal deductions to itemize. For
example, you could make substantial charitable contributions in one year, and
make none at all for one or more following years.
4. Selling your
house. Retired people often sell their homes to move into smaller
places or retirement communities. If you've lived in your home for a long time,
you probably have substantial equity and will earn a large profit on the sale.
Fortunately, you may not have to pay any tax on your profit. As long as you
live in your home for at least two out of the five years before you sell your
house, 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. (For more
on this, see Avoiding Capital Gains Tax When Selling Your Home: Read the Fine
Print.)
5. Retirement plan
contributions. Just because you are retired or semi-retired doesn't
mean that you can't make tax-deductible contributions to retirement plans such
as IRAs. Those over 50 have higher contribution limits for traditional IRAs,
Roth IRAs, and 401(k)s. Or, you may prefer to contribute to a Roth IRA. You'll
pay taxes on the income you contribute now, but the withdrawals upon retirement
are tax-free. This means no tax need be paid on all the interest or other
income earned by your Roth IRA investments. Retirees with their own businesses
may also establish SEP-IRAs, Simple IRAs, Keogh plans, and solo 401(k) plans
that have higher contribution limits for those over 55.
6. Business
expenses. Many retirees continue to run their own businesses or start
new ones. For example, some retired employees work part-time as a consultant
for their former employers and other clients. Having a business (whether full-
or part-time) is a great way to get tax deductions. You may deduct from your
business income all the necessary expenses you incur to do business, so long as
they are reasonable in amount. This includes business travel, the cost of
business equipment such as computers, and outside or home offices. If you incur
a loss from your business, you may be able to deduct it from other income you
earn, such as retirement income.
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Works Cited:
1.
Fishman, Stephen J.D. “Top Six Tax Deductions
for Seniors and Retirees.” Nolo. <https://www.nolo.com/legal-encyclopedia/top-tax-deductions-seniors-retirees-29591.html
>.