No matter your age, you’ll want to make sure you understand the tax deductions applicable to you to minimize your taxable income and, as a result, the taxes that you owe. If you’re a senior or retiree, these are the tax deductions you’re most likely to use.
You have the option of taking the standard deduction or itemizing your personal deductions on IRS Schedule A.
If your real estate taxes, home mortgage interest, medical expenses, charitable donations, and other personal deductions add up to be more than the standard deduction, then you will save more money by itemizing your deductions. Otherwise, go with the standard deduction (which will also save you some time).
More people than ever (90%) are taking the standard deduction this year, as the Tax Cuts and Jobs Act just about doubled the deduction amount when it went into effect in 2018.
Those 65 and over by December 31 of 2018 have a right to a larger standard deduction. If you’re married and filing jointly, your spouse will need to be over 65 as well.
Dental and Medical Expenses
If you choose to itemize your personal deductions, you can deduct some of your medical and dental expenses, which tend to be one of retirees’ and seniors’ largest expenditures. Dental and medical expenses can include prescription drugs, health insurance premiums (including Medicare), nursing home care, long-term care insurance premiums, and similar out-of-pocket expenses for health care.
A limit is imposed on these deductions, however, and it has to do with your adjustable gross income (AGI). For 2018 tax returns, you can only deduct expenses that are in excess of 7.5% of your AGI. If your AGI were $100,000, for instance, you could only deduct dental and medical expenses over $7,500.
Keep in mind that these rules will change for 2019 tax returns, when the deduction limit will increase to 10% of the taxpayer’s AGI.
Many seniors and retirees are in a better position to give back and donate to charity. Remember that any contributions that you make throughout the year are deductible.
Of course, like with dental and medical expenses, limitations apply:
- If your donations are in cash, you can deduct amounts up to 60% of your AGI.
- If your donations consist of property, you can deduct its fair market value. Adjustments may be necessary if the property has appreciated.
- If your donations consist of a boat, car, or plane and the value of the vehicle is greater than $500, you can only deduct the amount that the charitable organization sells it for.
You can only deduct charitable donations if you itemize, so many people choose to group various donations into one year (rather than making donations over several years) so that they have enough.
It’s not uncommon for seniors and retirees to sell their houses and move into retirement communities or smaller, more manageable places.
The longer you’ve lived in your home, the more equity you will have gained, meaning that you could make considerable profit from the sale. Luckily, if you’ve lived in your house for two or more years during the five years preceding the sale, some of the profit from the sale will not be taxed. The limit for single taxpayers is $250,00, and it increases to $500,000 for those who are married and filing jointly.
Some people choose to continue to manage their own businesses — or even found new businesses — after retiring. Whether you’re working part- or full-time, owning a business comes with many potential tax deductions.
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As long as they’re not outrageous, you can deduct all business expenses from your business income, including costs associated with equipment, home or outside offices, and travel. Any business losses you incur may be deductible from your other income as well.
Retirement Plan Contributions
Contributions to your retirement plan are tax-deductible, and you don’t have to stop making them when you retire. In fact, contribution limits increase for 401(k)s, traditional IRAs, and Roth IRAs for those over 50.
Contributing to a Roth IRA can help you avoid paying tax on any interest you earn, since contributions are taxed but withdrawals are tax-free.
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