Did you realize all these tax credits and deductions exist… or that they apply to retirees?
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 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.
In this article from Money Talk News we will explore several examples of federal income 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 an increase of $1,300 per married person or $1,650 per single person from the usual standard deduction. For the 2020 tax year – meaning the return that’s due in April – the IRS defines “senior” as someone born before Jan. 2, 1956.
For two married seniors, for example, that’s an extra $2,600 they get to subtract from their taxable 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 a retirement account. That means 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 $1,000 – or $2,000 for married taxpayers filing a joint return.
The main eligibility requirement, besides saving money in a retirement account, is having an income below a certain threshold, as we detail in “This Overlooked Retirement Tax Credit Gets Better in 2021.”
3. Health Insurance Premium Deduction…
If you are self-employed, you may be able to deduct your premiums for Medicare or other health insurance plans 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 example, the Medicare Part B standard monthly premium for 2020 was $144.60 per month – a potential write-off of $1,735.
4. Contributions To Traditional IRAs…
A federal law known as the Secure Act of 2019 repealed the maximum age for contributing to a traditional individual retirement account (IRA).
So as of the 2020 tax year, retirees who still are bringing in earned income, such as from a part-time job, can save money in this type of account no matter how old they are – and thus write off that contribution on their taxes.
There is no maximum age for contributing to a Roth IRA, either, although contributions to this type of account are not deductible on your tax return. Instead, you instead get to withdraw the money tax-free, provided that you otherwise follow the IRS rules for Roth accounts. (With a traditional IRA, withdrawals are considered taxable income.)
5. Spousal Contributions To Traditional IRAs…
While you can contribute to an individual retirement account (IRA) only if you have earned income such as wages, that can be your spouse’s income.
This means a working spouse can help a non-working spouse save money in a retirement account, as we detail in “7 Secret Perks of Individual Retirement Accounts.”
Spousal contributions to a traditional IRA also qualify you for a tax deduction, assuming you meet income and other eligibility requirements.
6. Charitable Write-Off Without Itemizing…
For the 2020 and 2021 tax years, there is another type of charitable deduction available to taxpayers who do not itemize their deductions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 temporarily changed the federal tax code such that people who claim the standard deduction can write off up to $300 in monetary donations to charity in 2020. So retirees who donated to charities last year now can claim that break on their return.
Then, a separate law enacted in December last year extended and expanded this charitable write-off for 2021, as we report in “2 Charitable Tax Breaks Have Been Extended for 2021.”