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Learn How to Avoid These 6 Common Tax Errors

Knowing how you need to file your taxes depends on your income and filing status, as well as which deductions and credits you can claim. In this free ebook, we share some common errors to avoid.

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Best Tax Deductions Available for Retirees

February 16, 2024

Best Tax Deductions Available for Retirees

Retirees who are 65 years and older should prioritize maximizing their tax deductions. This is especially crucial for those living on a fixed income, as they often need to stretch their retirement savings to cover their expenses throughout their lifetime.


However, preserving your finances during retirement can be challenging due to the varying tax treatments of different types of retirement income. As a result, retirees often overlook valuable tax-saving opportunities and must carefully assess their tax situation. Retirees need to familiarize themselves with commonly missed tax breaks available to individuals over 65 years old.


Additional standard deduction for individuals over 65

Once the age of 65 is reached, the IRS provides an additional standard deduction for individuals aged 65 and above. For instance, a single taxpayer age 64 is able to claim the standard deduction of $13,850 on their 2023 tax return. However, a single taxpayer who is 65 years old or older will be eligible for a standard deduction of $15,700 for the 2023 tax year.


This extra $1,850 makes it more likely for retirees to opt for the standard deduction instead of itemization of their deductions in 2023. (In 2024 the additional standard deduction amount changes to $1,850).


If you are married and either one of the spouses has reached age 65 or older, you are entitled to a larger standard deduction compared to taxpayers under 65 years old. If only one spouse is 65 years or older, the additional amount for 2023 is $1,550. If both spouses are 65 years or older, the extra amount increases to $3,000.


Spousal IRA contribution for retirees

Retirement does not necessarily mean the end of contributing to an Individual Retirement Account (IRA). Generally, you need to have earned income to make contributions to an IRA. However, if married with one spouse still employed, they can contribute up to $6,500 to a traditional or Roth IRA that you own. The IRA contribution limit for 2024 rises to $7,000.


If your spouse has sufficient earned income to fund contributions to your account (as well as their own), you are eligible for this tax benefit. This provides an opportunity for retirees to continue building their retirement savings even after leaving the workforce.

It is important to note the existence of a significant limitation. In the 2023 tax year, the combined contributions total to both spouse’s IRA accounts may not exceed $13,000 if only one of you is 50 years old or older. If both of you are at least 50 years old, the total contributions cannot exceed $15,000 ($16,000 for 2024).

Medicare Health Premiums Tax Deduction

When it comes to the Medicare premiums tax deduction, if you are or plan to become a self-employed individual or company after retirement, such as becoming a consultant, you are able to deduct the premiums paid for Medicare Part B and Part D. Additionally, you can also deduct the premiums paid for your Medicare (Medigap) supplement policies or the cost of a Medicare Advantage plan.


Self-employed retirees have the ability to deduct these expenses regardless of whether or not they itemize. However, it is important to note that you cannot claim this deduction if you are eligible to be covered under an employer-subsidized health plan provided by either your employer or your spouse's employer if they offer family medical coverage.

Low Income Tax Credit

Tax credit eligibility for low-income older adults requires meeting certain criteria and passing two income tests. A "qualified individual" is someone who, at the end of the tax year, either:

  • Is 65 years of age or older, or
  • Is under 65 years of age, retired due to permanent and total disability, and received taxable disability income.


The first income test is based on your Adjusted Gross Income (AGI).

  • If you file as single, head-of-household, or qualifying widow(er), your AGI must be below $17,500.
  • If you're married and filing jointly on the return where only one spouse qualifies for the credit, your Adjusted Gross Income (AGI) may not exceed $20,000.
  • Married couples filing jointly must have an Adjusted Gross Income (AGI) below $25,000 if both spouses qualify. Additionally, if you're married and lived apart from your spouse for the entire year, AND filing a separate return, your Adjusted Gross Income (AGI) must be lower than $12,500.


The second income test takes into consideration the combined total of your Non-Taxable Social Security, Annuity, Pension, and any Disability Income you may receive.
For single, head-of-household, and qualifying widow(er) taxpayers, the combined income must be less than $5,000.

The same income limit applies to those filing jointly when only one of the spouses qualifies for the credit. If both spouses qualify for the credit on the jointly filed return, the income limit is $7,500. For married individuals filing a separate return and not living with their spouse during the year, the limit is $3,750.


If you determine that you meet the eligibility requirements, you may be able to reduce your tax bill through this credit. However, calculating the credit can be complex. To simplify the process, the IRS offers to calculate the credit amount for you. To take advantage of this service, refer to the instructions provided in Schedule R.

Time Your Tax Payment

Paying taxes on time is crucial, even though Tax Day is commonly associated with April 15. In reality, income taxes are due when the income is earned, and employers automatically withhold said taxes from paychecks. However, when you retire, you are responsible for ensuring that the IRS receives its share of taxes on time. If you wait until the following year when your tax return is due to send a check, you may face unexpected tax penalties and interest.


To ensure timely tax payments, you have two options:


1st Option:
Withholding: Withholding is not limited to paychecks alone. If you receive regular payments from a 401(k) plan or company pension, taxes will be automatically withheld unless you instruct otherwise. The same applies to withdrawals from a traditional IRA. During retirement, it is generally up to you to decide whether a portion of the money should be proactively withdrawn for the IRS.


2nd Option:
Form W-4P: For 401(k)s, pensions, and traditional IRA withdrawals, taxes will be withheld unless you submit a Form W-4P to block withholding. For regular payments made periodically over more than one (1) year, withholdings are computed in the same manner as wage withholding.  In the case of traditional IRA distributions or non-periodic payments, a fixed rate of 10% is applied, unless you increase/decrease the withholding rate. That said, non-qualified or non-IRA distributions that may be rolled over tax-free to an IRA or other eligible retirement plan usually require a 20% mandatory withholding.


Social Security benefits operate slightly differently. Unless you specifically request it by filing a Form W-4V, there will be no withholding on your benefits. You have the option to choose a withholding rate of 7%, 10%, 12%, or 22% for Social Security.


Withholding is not necessarily a disadvantage, as it allows you to spread out your tax payments over the entire year. It can also simplify your life if you would otherwise need to make quarterly estimated tax payments.


Version 1: If your tax liability exceeds $1,000 beyond what is already withheld, you have the option to make quarterly estimated tax payments instead of relying solely on withholding. Failure to make these estimated payments may result in penalties for underpayment of taxes.

5 Be cautious of the pension payout trap

There is a special circumstance where you may not have control over whether taxes are deducted from your annuity, IRA, pension plan, or other retirement plan payments. If you receive a lump-sum payment or a distribution from a company plan, you could possibly fall into a common pension payout trap.

When you withdraw funds from your pension, annuity, IRA, or retirement plan, the company is required to withhold a flat rate of 20% for the IRS, regardless of whether you intend to roll over the dollars to an IRA account. Even if you process the rollover within the sixty-day period allowed period, the IRS will still retain the 20% until you file your income tax return for that year requesting a refund. This can be confusing because you may wonder how you can roll over the entire lump sum if the IRS is holding onto 20% of it. If you fail to come up with the additional funds for the IRA, the withheld amount will be treated as a taxable distribution. Consequently, this will trigger an immediate tax liability and reduce the overall amount in your IRA.


Fortunately, there is a solution to avoid this situation. You can request your employer to directly send the money to a rollover IRA instead. By having the check made out to your IRA instead of you personally, there will be no withholding. Even if you plan on using some of the money immediately, it is still advisable to ask your employer for a direct IRA transfer. This way, when you withdraw funds from the IRA, you have the choice of whether or not to have tax withholding.


The RMD workaround

A few years ago, required minimum distributions (RMDs) were not mandatory. Fast forward to current date and the requirement is now back in place.  The good news is that retirees who need to take RMDs from their traditional IRAs have an additional option to meet the pay-as-you-go requirement.


If you do not require the RMD for living expenses throughout the year, you can choose to wait until December to take the money. In this case, you can ask your IRA sponsor to withhold a significant portion of the distribution for the IRS. This amount should be sufficient to cover your estimated tax on both the RMD and any other taxable income you may have.

Therefore, if your RMD is sufficient to cover your tax liability, you can maintain the money within your IRA for most of the year while being able to avoid an underpayment penalty.

Contribute to charitable causes

Once you reach age 70½, there's a tax-efficient method to support charitable causes even if you don't itemize. It's known as a qualified charitable distribution (or QCD for short). Through a QCD, you can directly transfer up to $100,000 annually from your traditional IRAs to charitable organizations.

If you're married, your spouse can also transfer an additional $100,000 to charities from their IRAs. This transfer is not considered taxable income and fulfills your required minimum distribution. It's a beneficial arrangement for everyone involved!

However, should you itemize your deductions, you are not able to claim the tax-free transfer simultaneously to use as a charitable deduction.

Gift Money to Your Family

Support your loved ones financially by providing them with monetary assistance. In the United States, most individuals do not need to worry about the federal estate tax. This is because the IRS allows you to transfer up to $12.92 million to your heirs in the 2023 tax year without being subject to estate tax. If you are married, this amount doubles for you and your spouse. Furthermore, the estate tax exemption for the 2024 tax year increases to $13.61 million.


However, if you anticipate being subject to the estate tax in the future, be sure to take advantage of the annual gift tax exclusion. The Gift Tax rule permits you to give a specified amount of money each year to any number of individuals without having to worry about the gift tax. In 2023, the annual gift tax exclusion is $17,000, and it increases to $18,000 in 2024. Additionally, if you are married, your spouse can also give $18,000 to the same person, resulting in a tax-free gift of $36,000.


For instance, if the married couple has three married children and six grandchildren, they may give up to $36,000 in 2024 to each of your children and/or their spouses, including any 100% of the grandchildren all without having to file a gift tax return.

Tax-Free Sales Profit from a Vacation Home

Tax-free profit can be obtained from the sale of a vacation home under certain conditions. To qualify, the vacation home must have been your principal residence for a minimum of two of the last five years leading up to the sale of the property. Additionally, you may potentially benefit from tax-free profit even if the vacation home was not your primary residence.


Let's say you sell your main home and take advantage of the tax break that allows up to $250,000 in profit to be tax-free ($500,000 if you're married and file jointly). Afterward, you decide to make the vacation home a main (principal) home which you have owned for 25 years. Provided you make that vacation home your principal residence for at least two years, a portion of the profit from its sale can be tax-free.


It's important to note that the $250,000/$500,000 exclusion is not applicable to any of the growth and subsequent profit that occurred any time after 2008 when the home was not used as your principal residence. For instance, if you purchased the vacation property in 2001, and in 2015 you converted it to your primary residence and then sold it in 2022, the after-2008 vacation home use would account for seven out of the twenty years of ownership. Therefore, thirty-five percent of the profit would be subject to capital gains tax rates, while the remaining sixty-five percent would qualify for the $250,000/$500,000 exclusion.

Thank you for your interest

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Gloria Jean Cosentino, RF

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