For many seniors, enjoying their golden years in comfort means constantly looking for better and more effective ways to manage their budgets and maximize their money. By knowing which tax deductions for which you may be eligible, you can more successfully reduce your tax burden and make the most of your retirement savings or pension.
If you are an older adult or a retiree, it is important that you understand and take advantage of the deductions that you can use to reduce your income tax liability each year. These are some of the most valuable forms of tax relief:
All taxpayers can make standard deductions in IRS Schedule A or itemize their deductions. In general, if your personal deductions (mainly mortgage interest, real estate taxes, charitable donations, and medical expenses) are low, you should use the standard deductions.
Medical and dental treatment costs are often one of the most significant expenses that retirees incur. Fortunately, if you itemize these types of deductions, some of these expenses are tax-deductible. Getting Social Security disability benefits can help you manage healthcare-related costs, as the Social Security Administration provides this type of assistance. You may be able to use these financial benefits toward:
Medical and dental expenses can be deducted from your income tax on Schedule A of your tax return. However, there are certain restrictions.
This limit is 7.5% of the taxpayer’s adjusted gross income (AGI). This means that only expenses that exceed 7.5% of the taxpayer’s adjusted gross income can be deducted.
For example, if someone’s adjusted gross income is $100,000, only medical and dental expenses exceeding $7,500 (7.5% x $100,000 = $7,500) may be deductible.
Retirement is a time when many people consider giving back to the community through charitable donations. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), you can deduct up to $300 of charitable donations as an “exceeding regulation” deduction, and there is no need to itemize it.
Donations that exceed $300 can only be deducted as itemized deductions and are subject to other restrictions. A maximum of 60% of the adjusted total income can be deducted each year as itemized deductions.
If you donate non-cash property to a qualified organization, you can usually deduct the property’s fair market value. However, if the property appreciates in value, you may need to make some adjustments.
Because charitable donations that exceed $300 can only be deducted when you itemize them, you may want to attribute your contribution to one year so that there is enough personal deduction for a detailed explanation. For example, you can make many charitable donations in one year and not contribute during the following year or years.
Retirees often sell their houses and move to smaller places or retirement communities. If you live in your own home for a long time, you may have many assets and make a good profit on the sale. Fortunately, you may not have to pay taxes on your earnings. As long as you have lived in your home for at least two of the five years before selling the home, you can earn up to $250,000 (single taxpayer) and $500,000 (married taxpayer filing jointly) from the profits you make from the sale of your home.
The most popular tax credit for seniors and retirees is the senior or disabled tax credit. With a value of $3,750 to $7,500, this credit is ideal for waiving some or all of your tax bills.
To qualify for the senior tax credit, you should be:
In addition, your adjusted gross income or total non-taxable Social Security disability income must not exceed certain limits, which are:
As the tax credit is designed to benefit the elderly, it provides one of the best opportunities to limit taxes and keep more of your money.
Just because you are past retirement or semi-retirement age, it does not mean that you cannot make tax-exempt contributions to a retirement plan. People ages 50 and older have higher contribution limits for traditional IRAs, Roth IRAs, and 401(k) accounts.
You will pay taxes on the income you contribute now, but withdrawals in retirement are tax-free. This means that you do not have to pay taxes on all interest or other income that your Roth IRA investments earn.
Many retirees continue to run their businesses or even start new ones. For example, some retired employees work part-time as consultants to former employers and other clients. Running a business (full-time or part-time) is a great way to get tax relief.
You can deduct all the necessary expenses that your business incurs from your business income, as long as the amount of these expenses is reasonable. This includes the cost of business travel, computers, and other business equipment, as well as the cost of your offices. If your business suffers a loss, you can deduct it from other income you earn (such as retirement income).
If you need help determining the best tax credits and deductions for seniors, we are here to help. Seeking assistance from a Social Security disability lawyer can help you understand every aspect of the process. When you receive disability benefits, it can become easier to manage your household and medical expenses. You can discuss your concerns with our attorneys and learn what steps you can take to manage the situation.