Tax Strategies Every Retiree Should Know

After spending decades working hard, saving money, and planning, most people look forward to retirement. Once retired you may feel tempted to cut loose a bit and forget about tax planning, but one of the keys to a successful retirement is careful budgeting and smart financial planning to make your savings last. This means that you should pay attention to your income tax liability and make sure you are taking advantage of every tax deduction and credit available. Here are some tax strategies including deductions, credits, and planning considerations every retiree should know.

Standard Deductions

When you consider tax deductions, most taxpayers consider the possibility of claiming itemized deductions. However, if you do not have a mortgage or outstanding home equity loan or line of credit and have limited medical expenses paid out of pocket, claiming the standard deduction may make the most sense for you.

In 2021 the standard deductions are as follows:

• $12,550 for single filers (plus $1,700 if the taxpayer is 65 or older or blind)
• $12,550 for married couples filing separately (plus $1,350 if the taxpayer is 65 or older or blind)
• $18,800 for heads of households (plus $1,700 if the taxpayer is 65 or older or blind)
• $25,100 for married couples filing jointly (plus $1,350 for each taxpayer who is 65 or older or blind)
• $25,100 for a qualified widower (plus $1,350 if the taxpayer is 65 or older or blind)

Medical Expense Deductions

Taxpayers who itemize their deductions and paid out-of-pocket medical expenses that exceed 7.5% of their adjusted gross income (AGI).

Medical expenses are the costs associated with the diagnosis, cure, mitigation, treatment, or prevention of a disease that is recognized by the medical community as well as the costs for treatments affecting any area or function of the body. Medical expenses can include the cost of supplies, equipment, and diagnostic devices needed. Medical expenses also include dental expenses and certain costs of long-term care.

According to IRS Publication 502, generally, only nursing services performed by a home care worker can be deducted. These services do not need to be performed by a nurse. Some examples of qualifying services include giving medication, changing dressings for wounds, as well as bathing and grooming the patient.

For the complete list, see IRS Publication 502 (pages 5-15).

It is important to note that qualifying medical expenses paid for you, your spouse, and your dependents in excess of 7.5% of your AGI are eligible for the medical expense deduction. This means that if you have dependent children or claim another person, such as an elderly parent or sibling with special needs, as a dependent on your income tax returns, then the qualifying medical expenses that you have paid for them are also part of the potential deduction.

Charitable donations

A common tax deduction that many retirees take advantage of is making contributions to a qualified charity. If you plan to downsize your lifestyle and are considering donating a vehicle, old furniture, or simply make a cash donation to a good case, you should make sure you receive a written confirmation of the donation and provide information about the donations to your tax preparer.

In general, contributions to charitable organizations may be deducted up to 50% of AGI. Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30% of your AGI.

You should determine if the charitable organization you plan to donate to is considered tax-exempt and what the deductibility of the donation will be. See the IRS Tax Exemption Organization Search.

Home Sale Gain Exclusion

If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home. If you are married or your spouse has passed less than 2 years from the sale of the home, then you can claim $250,000 for you and your spouse (totaling $500,000). This exclusion from gain will be very important for many retirees who are looking to downsize a home they purchased decades ago that has since increased in value.

Retirement savings

If you still receive earned income such as income from a part-time job or business, you can continue making contributions to a retirement savings account like a traditional IRA. Although you cannot contribute an amount that exceeds your earnings, you can contribute up to the annual IRS-set contribution limits. For 2021 and 2022 the traditional IRA contribution limit is$6,000 per individual or $7,000 for taxpayers who are age 50 or older.

Also, if one spouse is not working but the other continues to work then it is possible to contribute to the working spouse’s IRA and an IRA for the non-working spouse if they file a joint tax return with the working spouse.

Spousal IRAs have the same annual contribution limits as any other IRA: $6,000 per individual in 2021 and 2022, or $7,000 for taxpayers who are age 50 or older. Under the spousal IRA rules, a couple where only one spouse works can contribute up to $12,000 per year, $13,000 if one spouse is 50 or older, or $14,000 if both are 50 or older.

Home Business Deductions

Just because you are retired doesn’t mean your income-earning days are behind you. Many retirees work as consultants or create home-based businesses. These endeavors may create many opportunities to claim business expenses as deductions, such as home office expenses, legal and professional fees, business travel expenses, and business equipment.

Elderly or Disabled Tax Credit

For some senior citizens or individuals who are permanently disabled, there is the potential of taking the Elderly or Disabled Tax credit. This credit can range between $3,750 and $7,500 depending on your situation. To be eligible a taxpayer must be:

• Aged 65 years old or older or retired on permanent and total disability and received taxable disability income for the tax year; AND
• With an AGI or the total nontaxable social security, pension annuities or disability income under specific limits.

In order to take this credit, the taxpayer must complete Schedule R (Form 1040). For more information see IRS publication 524.

As always, be sure to consult with an experienced estate planning tax attorney to learn about the tax strategies every retiree should know.