How does the adage go? With age comes … new ways to save on taxes.
While you can’t stop filing taxes just because you retire, being a retiree often means you can claim some worthwhile tax breaks such as credits and deductions.
In some cases, these tax breaks are available to both workers and retirees, so the latter often don’t realize they might be eligible. In other cases, these tax breaks are effectively reserved for older taxpayers, meaning taxpayers may not hear about them until later in life.
Following are five examples of tax breaks that retirees often overlook.
1. Bigger standard deduction
For seniors who don’t itemize their tax deductions, a higher standard deduction is a free potential reduction in your tax bill.
Seniors generally get a $1,300-per-person (if married) or $1,600-per-person (if single) bump up from the usual standard deduction. For tax year 2018 — meaning the tax return that’s due in April — the IRS defines “senior” as someone born before Jan. 2, 1954.
For two married seniors, for example, that’s an extra $2,600 they get to subtract from their adjusted gross income — without doing any work or keeping any receipts. What savings that actually translates into will depend on their income, but it means a lower starting figure for Uncle Sam to tax them on.
2. Saver’s Credit
What’s better than a tax deduction? A tax credit! A deduction lowers your taxable income, but a credit reduces your tax bill dollar for dollar.
The Saver’s Credit isn’t specifically for retirees, so they might easily overlook it. But it’s for any eligible taxpayer who is saving money in an eligible retirement account, meaning it’s available to retirees who are still able to stash cash in a retirement account — assuming they otherwise qualify for the credit.
So, for as long as you’re contributing to a retirement plan, you should be checking your eligibility for the Saver’s Credit each year. If you’re eligible, it could reduce your taxes by up to $2,000 — or $4,000 for married taxpayers filing a joint return.
The main eligibility requirement is having an income below a certain threshold, as we detail in “Most Workers Don’t Know This Retirement Tax Credit Exists.”
3. Medicare premium deduction
If you are self-employed, you may be able to deduct your premiums for Medicare health insurance as a business expense. According to the IRS:
“You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. … Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction.”
For 2018, the Part B standard monthly premium was $134 per month — a potential write-off of $1,600.
4. Spousal contributions to traditional IRAs
You can only contribute to an individual retirement account (IRA) if you have earned income, but that can be your spouse’s income. This means a working spouse can help a non-working spouse save money in a tax-advantaged retirement account — which is why we cite spousal IRAs in “5 Ways Marriage Can Make You Wealthier.”
Spousal contributions to a traditional IRA — as opposed to a Roth IRA — also qualify you for a tax deduction, assuming you meet income and other eligibility requirements.
To learn more about these two types of accounts, check out “Which Is Better — a Traditional or Roth Retirement Plan?”
5. Charity benefit without itemizing
Generally, taxpayers have to itemize their deductions — as opposed to claiming the standard deduction — if they want credit for donating to charity. And after the enactment of the Tax Cuts and Jobs Act in 2017, standard deductions got bigger, meaning fewer people are expected to seek the benefit from itemizing.
Some retirees may effectively be able to get around this, however.
After age 70 ½, you can transfer money from an IRA to a charity and have the amount count toward your required minimum distribution (RMD) without counting as taxable income for you. The IRS calls it a “qualified charitable distribution.”
This isn’t a true tax credit or deduction but still has the effect of lowering your taxable income and thus possibly your tax bill, because your RMDs would usually otherwise count as taxable income.
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