Regardless of age, working folks will always have one thing in common: the need to file taxes every year like clockwork. And somehow, it’s already that time of year again, where a tax filing can either result in a nice chunk of change in the form of a refund, or a stressful tax bill.
It goes without saying that it’s always better to get money back rather than paying in. One way to help with that is to search for overlooked tax breaks and deductions that can help lower your tax bill.
Many seniors may not realize they qualify for additional tax breaks that can help save them money in their golden years. 1-800Accountant’s goal is to help taxpayers save as much as possible when tax season rolls around. Check out our list of the eight most overlooked tax breaks and deductions for retirees.
1. Larger Standard Deduction
The first overlooked tax deduction for retirees is the ability to take a larger standard deduction.
Did you know that when you turn 65, the IRS sends you a birthday gift? Well, not literally. Rather, they offer a larger standard deduction of $14,250 for single taxpayers instead of $12,550. For married couples, if one spouse is 65 or older, they qualify for an additional $1,350 on the standard deduction. If both spouses are 65 or older, it increases by $2,700.
2. Medicare Premiums
Nearly 64 million Americans are enrolled in Medicare. While most of the cost of Medicare is covered by payroll taxes, general revenue, and Medicare Savings Programs, enrollees typically pay approximately 15% of the cost of Medicare through their monthly premiums.
Fortunately, Medicare expenses, including Medicare premiums, can be tax-deductible. In addition to deducting all medical expenses that are more than 7.5% of a taxpayer’s AGI, it’s possible to deduct the different Medicare premiums. However, the rules for each premium deduction depend heavily on your income, employment status, and other circumstances, so it’s best to consult with an accountant to see if you qualify for a deduction.
3. Contributions to Traditional IRAs
For traditional IRAs, the contribution limit is $6,000, and the contribution limit is $7,000 if you’re 50 or older. If you’re 70 years and 6 months old or older, there’s no age limit to contribute to your traditional IRA.
If you’re not covered by a retirement plan at work and are filing as single, head of household, married filing jointly, or separately, you can take a full deduction up to the amount of your contribution limit.
You can take a partial deduction if your modified Adjusted Gross Income is between $198,000 and $208,000 and you’re married filing jointly with a spouse covered by a plan at work.
Remember, Roth IRA contributions are not deductible. Check out the full IRA contribution and deduction limits at the IRS.
4. Spousal Contributions to Traditional IRAs
The fourth overlooked tax deductions for retirees are spousal contributions to traditional IRAs. This type of IRA is also known as a spousal IRA, and it’s a way for one spouse to contribute to a non-working spouse’s IRA and effectively double their retirement savings for the year.
Spouses can contribute to traditional IRAs if one spouse is working. A non-working spouse is a spouse who isn’t earning income from a job or from self-employment.
There are requirements to qualify for spousal IRA contributions. If you’re a working spouse and you want to contribute on behalf of your non-working spouse, you’ll file a joint income tax return. You’ll also need to have eligible compensation of at least the total spousal IRA contribution, plus your own IRA contribution. Also, each spouse’s IRA must be held separately, not jointly.
5. Qualified Charitable Distribution
Qualified charitable distributions, or QCDs, are withdrawals from an IRA made to eligible charities, and they count towards the required minimum distribution.
Once you turn 70 ½, you can make up to $100,000 a year of QCDs from your IRAs. While the QCD money taken out of your IRA is considered federally-taxable income, you can offset this by subtracting the QCD from your reported retirement income. However, QCDs can only be made from IRAs, 401(k)s and other retirement accounts are not eligible.
Here are the requirements for QCDs:
- To make a qualified charitable contribution, you must be aged 70 years and 6 months. You’ll have to take required minimum distributions (RMDs) at age 72.
- Funds from an IRA will need to be transferred from your IRA to an eligible charity, which is one that’s approved by the IRS.
- Examples of eligible charities are 501(c)(3) organizations and houses of worship.
The maximum contribution for qualified charitable distributions is $100,000 per IRA owner for the 2021 tax year. If you’re married, you and your spouse can donate up to $100,000 individually.
6. Annual Gift Tax Exclusion
Each year, there’s a maximum amount that you can gift without paying taxes on the gift’s value. This is known as the annual gift tax exclusions.
The annual gift tax exclusion limit for 2022 is $16,000, and there’s also flexibility in how you can give gifts. You don’t have to give the maximum amount at once. If you exceed the annual gift tax exclusion limit for the year, you’ll pay tax on the surplus amount.
7. Tax-Free Profit from a Vacation Home
The IRS has several rules for how retirees can make a tax-free profit from a vacation home, which depends on how long you’ve used your property:
- Owner used property for more than 14 days
- Property rented for two weeks or less
- The 14-Day or 10% Rule
Retirees who are vacation homeowners using their home, and not renting it out for any time during the year, can deduct real estate taxes and interest on their home mortgage.
If you put your vacation property for rent for two weeks or less each year, you won’t have to report your rental income. In this case, the IRS considers your property a personal residence. You can deduct mortgage interest and property taxes, but you won’t be able to deduct expenses as rental expenses.
For retirees who use their vacation home or put up their vacation home for rent for more than 14 days, or 10% of the total days, there are additional rules. The IRS will still consider your property a personal residence, meaning you can’t deduct your rental loss. However, you can still deduct your mortgage interest, property taxes, and rental expenses.
8. Tax Credit for Low-Income Seniors
A tax credit for low-income seniors is the last of the overlooked tax deductions for retirees. This credit ranges from $3,750 to $7,500, and it’s available for taxpayers who qualify under the following criteria:
- Aged 65 or older, or retired on permanent and total disability
- Have received taxable disability income for the tax year
- With an adjusted gross income, or total nontaxable Social Security, pensions annuities, or disability income, under specific limits.
Contact the Professionals for Your Tax Needs
As a retiree, tax breaks and tax deductions are a fantastic way to lower your tax bill when tax season comes around. We’ve found that many retirees are surprised and delighted to find that they qualify for one or more of the tax breaks and deductions mentioned here in this article — it just takes working with the right tax professional who can help you discover what you’re eligible for and how to
When it’s time for you to see if you qualify for certain tax breaks or tax deductions, work with accountants who know the tax code inside and out. Contact the pros at 1-800Accountant for your income tax filing needs.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.