Top 6 Tax Deductions for Seniors
Top 6 Tax Deductions for Seniors
Like most seniors, you’ve worked hard all your life to provide for your family and nurture your retirement nest egg. You also want to make sure the money you have leftover is well-spent for your enjoyment.
Not simply forked over to the government.
Luckily, tax deductions and other financial strategies exist for seniors that can help you save and save big.
Let’s take a quick look at the top 6 tax deductions available to seniors.
The Standard Deduction for Seniors
These days, itemizing tax deductions may be more trouble than it’s worth for many. That’s because the Tax Cuts and Jobs Act (TCJA) reform approved in 2017 almost doubled the standard deduction.
For 2020, the standard tax deductions are:
- Single: $12,400
- Head of Household: $18,650
- Married Filing Separately: $12,400
- Married Filing Jointly: $24,800
- Qualifying Widow(er): $24,800
This act made it even more beneficial for seniors who want an easy way to save money on taxes. Once you turn 65, the standard deduction increases by $1,650 if you file as single or head of household. If you and your spouse are both 65 or older and filing jointly, the standard deduction is $2,600 more.
For many, taking the standard deduction for seniors is a quick and easy way to help save on your tax bill. But…
There are some circumstances in which you may want to consider itemizing your taxes. The next two deductions may represent a good reason to itemize.
If you’re a senior who earned a good living and made great financial decisions, you may have the urge to use your expendable income to give back to your community or support a cherished cause.
Charitable donations offer a chance to support worthy causes AND reduce your taxable income. When these sizable donations are itemized, you help others while also decreasing your tax bill…everyone wins!
You can itemize and deduct charitable donations up to 60% of your adjusted gross income (AGI).
To be clear: adjusted gross income (AGI) is the total of your income—wages, dividends, capital gains, etc.—minus qualifying expenses like charitable donations, alimony payments, retirement contributions, or medical expenses.
Medical & Dental Expenses
As you probably know, medical and dental costs are often an expensive reality of getting older. A new prescription, necessary procedure, or sudden illness can put a sizable dent in your budget.
The good news: medical expenses like health insurance premiums, prescriptions, long-term care insurance, medical equipment, and more may be tax-deductible.
Medical tax deductions require you to itemize your tax return. If you’re 65 or older, medical expenses can reduce your taxes once they reach more than 7.5% of your AGI. Let’s say your AGI is $35,000. After you pay out the first $2,625 of eligible healthcare costs, the rest of your medical expenses are tax-deductible.
If you are paying a lot of out-of-pocket expenses for your medical and dental care, then this is a senior tax deduction you should explore.
Aside from itemizing your tax returns with the tax deductions mentioned above, you may want to consider these other tax breaks.
Tax Credit for the Elderly & Disabled
This is a popular deduction for qualifying seniors who aren’t taking in very much income. The Tax Credit for the Elderly can reduce or eliminate the taxes that you owe to the government.
To qualify for this tax credit you must be:
- 65 or older (or)
- Under 65 but retired on permanent disability or total disability while receiving taxable disability income
- A US citizen or resident alien
- Below specified limits of adjusted gross income (AGI) and nontaxable social security, pensions, and annuities
Let’s take a closer look at income limits:
If you are filing as single, head of household, or a qualifying widower, then your AGI can’t be over $17,500. In addition, your nontaxable social security, etc. can’t be more than $5,000.
If you are filing jointly and only one spouse qualifies, your AGI can’t be over $20,000 or your nontaxable income over $5,000.
If you are filing jointly and both qualify, then your AGI can’t be over $25,000 or your non-taxable income over $7,500.
Finally, if you are married and filing separately and you’ve been separated from your spouse for the year, your AGI can’t be more than $12,500 or your non-taxable income over $3,750.
In summary, you may be eligible for a tax credit between $3,750 and $7,500. To review more details on the Tax Credit for the Elderly & Disabled, visit the IRS website.
Put Extra Money Into Your Retirement Accounts
Even if you got a late start on your retirement savings, you could still catch up. Once you reach age 50 or older, you can contribute even more income to your 401(k) or IRA.
Currently, individuals under 50 can invest $6,000 annually into an IRA contribution. If you’re over age 50, however, then you can add an extra $1,000 to that. For a 401(k), individuals under 50 can contribute $19,500 annually. Those over 50 can add $6,500 to that total.
Contributions made to a traditional 401(k) are tax-deductible. This means what you invest into your 401(k) isn’t included as taxable income—helping to reduce your current tax bill.
Similarly, IRA contributions are tax-deductible. But you first need to meet certain requirements. If you (and your spouse) don’t have a retirement plan at work, then IRA contributions are tax-deductible. If there is a plan available, IRA deductions aren’t allowed if your modified adjusted gross income is above $75,000 (or $124,000 if filing jointly).
On the other hand, Roth IRA or Roth 401(k) contributions are made after taxes. You won’t get a tax break for contributing to these accounts. But, remember, you won’t have to pay taxes for these funds once you start making withdrawals.
Wait on Your Required Minimum Distributions
Don’t need to start drawing from your tax-deferred retirement plan yet? Then wait it out. Under new laws, you don’t have to start your required minimum distributions (RMD)—the amount the government requires you to take out from an IRA or 401(k)—until you are 72.
Still living comfortably at 72? Congrats, you’ve definitely been smart with your money! But not taking your RMD can mean a hefty IRS penalty of 50% of the amount the government says you should take. For example, if you had an RMD of $7,500 that you didn’t take, the IRS will charge you $3,750.
There is a loophole here, however. If you don’t need that RMD for living expenses, consider giving the payout directly to charity. You won’t get the charitable deduction mentioned above. You will, however, get that charitable contribution excluded from your taxable income.
Need Help Navigating the Tax Laws?
The government has ways to help seniors save money on their taxes. Unfortunately, sometimes it may seem pretty complicated. Do you want to spend your “golden years” trying to figure out tax codes or marking things off your bucket list?
We thought so.
Steven Lissner & Company has over thirty years of experience helping individuals maximize their tax deductions. Sure, you could use “convenient” software like TurboTax. But will these quick-filing tax tools end up costing you more money in the long run?
It’s certainly possible.
Our certified public accounting professionals provide the customer service and attention to detail that finds you the latest tax deductions—saving you money! We will use every “tax trick” available to make your tax bill more like a tax return.
We can get started quickly. Simply provide the essential tax prep paperwork. We’ll keep all your documents safe and secure and begin the process of finding ways to save your hard-earned money.
Have more questions? Give us a call at (973) 917-4080. We’ll set up a consultation to see how we can best serve you.