There are few advantages to growing older in the United States, but one of the few is taking advantage of tax breaks that favor seniors and retirees.
The Internal Revenue Service (IRS) advises you to consider these tax breaks for income earned in 2016. Make sure you take advantage of them!
Top 8 Senior Tax Deductions
1. Medical and Dental Expenses. This is the final year seniors age 65 and older can take advantage of deducting up to the limit of 7.5% of Adjusted Gross Income (AGI) for medical and dental expenses. Next year, taxpayers, no matter what their age, can deduct only medical and dental expenses over 10% of AGI.
Taxpayers can deduct health insurance premiums, including Medicare premiums, long-term care insurance premiums, prescription drugs, medical transportation, nursing home care and other out-of-pocket healthcare expenses. Prepaid medical costs, such as the portion of any lump sum entry fee and monthly fee attributable to medical care paid by retirement community residents, are also deductible.
2. Capital Gains from Selling Your House. If you lived in your house for at least 2 of the 5 years before you sold it, up to $250,000 of the profit ($500,000 for married taxpayers filing jointly) is not taxable. If you profited less than $250,000 ($500,000 for couples), you will only have to report the sale if you receive a Form 1099-S from your real estate broker.
If your spouse passed away, and you did not remarry before you sold your main home, you can exclude $500,000 if the sale took place within two years of your spouse’s death. If you sold another home 2 or less years before the sale and took the capital gains exclusion for it, you can’t take the exclusion for the second home. There are a few more criteria, so if either of these apply, contact a tax advisor.
3. Retirement Plan Contributions. If you’ve continued to contribute to your IRA, congratulations on a wise choice! If you’re over 50, you can contribute $6,500 annually to your IRA. Traditional IRAs permit you to make tax-free contributions, although you must pay taxes when you withdraw the money. On the other hand, you may have to pay taxes on money contributed to a Roth IRA, but you won’t have to pay when you withdraw your money.
If you have your own business, you can establish your own SEP-IRA, simple IRA, Keogh plans or solo 401K plans.
4. Investment Expenses. Continue to make your money work for you even after you retire by investing. Dividends and capital gains are taxed by the federal government at lower rates than regular income and are not subject to Social Security or Medicare taxes.
Fees for investment advice or accounting services are deductible if they, as well as other itemized personal deductions, exceed 2% of your AGI. These fees include attorney and accounting fees, financial planner fees, safe deposit box fees, subscriptions to investment newsletters, fees for online services, home computers used for investment purposes and fees paid to a broker, bank or trustee to collect investment income, such as taxable bond interest, mortgage interest or stock dividends. Fees paid to a broker for stocks, bonds and other investment property are not deductible.
5. Business Expenses. If you have your own business or you continue to work as a freelancer or consultant, you can deduct your business expenses, including travel, your cell phone, equipment, and office space.
6. Charitable Contributions. Cash contributions of up to 50% of your AGI are deductible if you itemize using Form 1040 or 1040A. You can deduct the fair market value of donated property, although if the property has appreciated in value, you should consult with a financial advisor. If you donate a car, boat or airplane, your deduction is limited to the gross proceeds of its sale by the charitable organization if you claim its worth as greater than $500.
You can donate money from your Traditional IRA without paying taxes if your account custodian sends the donation directly to the charitable organization.
7. Standard Deduction. If you’re no longer paying mortgage interest, it may make sense to take the standard deduction. If you turn 65 by January 1 of the next tax year or if you’re blind or disabled, you get a higher standard deduction. If filing jointly, only one spouse must meet the criterion. You must use Form 1040 or Form 1040A to qualify for the credit.
- Dependent Credit. If your child provides at least half your support, that person may claim you as a dependent. If several children cooperate in providing financial support, only one may claim you.
- Elderly Dependent Care Tax Credit. If your child pays for day care or home care in order to work, the child may receive an additional tax credit.
Some federal tax deductions are similar to deductions in some states, but states may offer additional tax exemptions.
For example, in New Hampshire, there is no state income or sales tax. There is also an elderly exemption for property taxes. This is, perhaps, one of the reasons so many people retire to New Hampshire.
Are you considering downsizing?
Downsizing has many advantages, including
- fewer household chores
- less tax and mortgage expense
- change of environment
If you’re thinking of downsizing, but delaying because of concerns about a smaller home, check out “10 Tips for Decorating After Downsizing” for ideas.