Tax Deductions for Retirees … Hang On to More of Your Hard-Earned Money!
No retiree who's worked hard over a lifetime to save money wants to throw it away. But the fact is, too many retirees do just that simply because they're unaware of many of the tax deductions available to them.
What deductions?
There is a long list, but for now let us focus on several tax deductions every retired American ought to know about.
Standard Deduction
The standard deduction is available to most income tax filers. As nearly every tax filer knows, it reduces your taxable income by the standard deduction amount.
Presently, for tax filers who are under 65, the standard deduction is:
* $5,950 for single filers including married persons filing separately
* $11,900 for married couples filing jointly, and for qualifying widows and widowers
For tax filers who are 65 or older by the end of the tax year they are filing for, the standard deduction is:
* $7,400 for single filers including married persons filing separately
* $13,050 for married couples filing jointly if one spouse is 65 or over
* $14,200 for married couples filing jointly if both spouses are 65 or over
Who qualifies for the standard deduction?
The vast majority of filers qualify for the standard deduction. However, a married person filing separately does not qualify for the standard deduction if his or her spouse chooses to itemize deductions.
Overall, about two-thirds of tax filers nationally claim the standard deduction.
Does that mean it's better to take the standard deduction than to itemize?
It depends. Many people prefer to take the standard deduction simply because it's so easy. It doesn't require keeping records or receipts, so for many filers it eliminates the fear of getting into trouble if they're ever audited by the IRS. Taking the standard deduction certainly simplifies things for many people. But, unfortunately, for some people it's the wrong move because they could have saved a lot of money if they had itemized all the deductions they qualified for.
Those deductions might have included:
Medical Expenses
The majority of medical expenses you, your spouse, and your dependents incur are tax-deductible. However, only medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI) can be deducted
from your taxes. This means, for example, that if your medical expenses equal 9 percent of your AGI, only the remaining expenses totaling 1.5% of your AGI are tax-deductible.
If you are enrolled in Medicare, tax-deductible medical expenses are not limited to what Medicare approves. The IRS allows tax deductions for a wide range of medical services ranging from checkups and preventive care to treatments, long-term care, and much more. However, toiletries and cosmetics, cosmetic surgery, programs for general health improvement, nicotine gum and patches, and nonprescription drugs other than insulin are among items and services that are not tax-deductible.
Most out-of-pocket payments including premiums and deductibles are tax-deductible as long as you are the one paying for them. This is true with regard to private insurance as well as Medicare. Any premiums paid by an employer are not tax-deductible.
There will be a increase in the threshold for claiming medical expenses when you file taxes for the 2013 tax year. When you file your 2013 return next year, only medical expenses that exceed 10% of your Adjusted Gross Income will be deductible.
This will represent an increase of 33% over the current threshold, and is likely to result in higher out-of-pocket medical costs for many Americans during the coming years. One solution to this development is to enroll in a Medicare supplement plan.
Mortgage and Homeowner Deductions
If you sell a house, some or all of any profit on the sale is tax-deductible if you lived in the house for at least two of the five years immediately preceding the sale.
If you meet this condition, profit is tax-deductible up to $250,000 for a single taxpayer and $500,000 for a couple filing jointly.
For tax purposes, costs connected with the sale can be deducted from the selling price before profit or capital gain is determined. Acceptable sale-related costs include advertisement costs, inspection and closing costs, legal and title insurance fees, broker fees, and cost of repairs required as a condition of the sale and taking place within 90 days.
Interest paid on mortgage debt up to $1 million is tax-deductible, and refinancing costs often qualify for tax deduction. If refinancing leads to a loan of greater value than the first mortgage's because significant improvements were made on the home, you should be able to deduct the cost of those improvements.
Certain energy-saving improvements to your home may qualify for tax credits, and all but the first $500 in damages caused by a natural disaster are tax-deductible. Finally, every homeowner needs to be aware that local property taxes may be itemized and deducted.
Job-Related or Business Deductions
If you are among the many retired persons who are planning to return to the workforce, you'll be glad to know that job-hunting costs are often tax-deductible. Qualifying costs can include those spent on resumes, job counseling, and travel.
If you are self-employed, whether part-time or full-time, you may qualify for many tax deductions including those for:
* Capital expenses
* Transportation expenses
* Vehicle depreciation
* Equipment costs
* "Bad debts"
* Home office expenses
All deductions claimed must be directly related to operating your business, and financial records should be accurate and complete.
Charitable Donations
Donations you make to qualifying charities and nonprofits are tax-deductible. Such contributions can total up to 50% of your Adjusted Gross Income.
For donated items other than cash, the amount of your deduction is based on the fair market value of the donated item. For an item donated for a fundraiser, the amount of your deduction, if you value the donated item at more than $500, will be equal to the amount of money raised through the sale or raffling off of your item.
If you volunteer for a charity, costs you incur while volunteering may qualify for tax deduction. For example, if you purchase cooking items or ingredients used in a charity's soup kitchen, you can claim those costs.
Retirement Plan Contributions and Investment Costs
For a married couple over 50, traditional IRA contributions up to $13,000 per year normally qualify for tax deduction.
While Roth IRA contributions are not tax-deductible, they are taxed before going into the account, and grow without further taxes. Funds eventually taken out of Roth IRA accounts remain tax-free.
Many investment-related fees, meanwhile, are tax-deductible as long as they—combined with the other items you itemize and deduct from your taxes—total at least 2% of your Adjusted Gross Income. Qualifying investment-related fees include accountant or financial planner fees, certain broker and attorney fees, and certain costs related to computer use.
Not easy, but well worth it …
It can be a chore to go through all your possible tax deductions to determine whether you're better off itemizing or settling for the standard deduction, but many retired Americans – determined not to hand over any more money than necessary to Uncle Sam – are thankful they took the time to weigh their options.
What deductions?
There is a long list, but for now let us focus on several tax deductions every retired American ought to know about.
Standard Deduction
The standard deduction is available to most income tax filers. As nearly every tax filer knows, it reduces your taxable income by the standard deduction amount.
Presently, for tax filers who are under 65, the standard deduction is:
* $5,950 for single filers including married persons filing separately
* $11,900 for married couples filing jointly, and for qualifying widows and widowers
For tax filers who are 65 or older by the end of the tax year they are filing for, the standard deduction is:
* $7,400 for single filers including married persons filing separately
* $13,050 for married couples filing jointly if one spouse is 65 or over
* $14,200 for married couples filing jointly if both spouses are 65 or over
Who qualifies for the standard deduction?
The vast majority of filers qualify for the standard deduction. However, a married person filing separately does not qualify for the standard deduction if his or her spouse chooses to itemize deductions.
Overall, about two-thirds of tax filers nationally claim the standard deduction.
Does that mean it's better to take the standard deduction than to itemize?
It depends. Many people prefer to take the standard deduction simply because it's so easy. It doesn't require keeping records or receipts, so for many filers it eliminates the fear of getting into trouble if they're ever audited by the IRS. Taking the standard deduction certainly simplifies things for many people. But, unfortunately, for some people it's the wrong move because they could have saved a lot of money if they had itemized all the deductions they qualified for.
Those deductions might have included:
Medical Expenses
The majority of medical expenses you, your spouse, and your dependents incur are tax-deductible. However, only medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI) can be deducted
from your taxes. This means, for example, that if your medical expenses equal 9 percent of your AGI, only the remaining expenses totaling 1.5% of your AGI are tax-deductible.
If you are enrolled in Medicare, tax-deductible medical expenses are not limited to what Medicare approves. The IRS allows tax deductions for a wide range of medical services ranging from checkups and preventive care to treatments, long-term care, and much more. However, toiletries and cosmetics, cosmetic surgery, programs for general health improvement, nicotine gum and patches, and nonprescription drugs other than insulin are among items and services that are not tax-deductible.
Most out-of-pocket payments including premiums and deductibles are tax-deductible as long as you are the one paying for them. This is true with regard to private insurance as well as Medicare. Any premiums paid by an employer are not tax-deductible.
There will be a increase in the threshold for claiming medical expenses when you file taxes for the 2013 tax year. When you file your 2013 return next year, only medical expenses that exceed 10% of your Adjusted Gross Income will be deductible.
This will represent an increase of 33% over the current threshold, and is likely to result in higher out-of-pocket medical costs for many Americans during the coming years. One solution to this development is to enroll in a Medicare supplement plan.
Mortgage and Homeowner Deductions
If you sell a house, some or all of any profit on the sale is tax-deductible if you lived in the house for at least two of the five years immediately preceding the sale.
If you meet this condition, profit is tax-deductible up to $250,000 for a single taxpayer and $500,000 for a couple filing jointly.
For tax purposes, costs connected with the sale can be deducted from the selling price before profit or capital gain is determined. Acceptable sale-related costs include advertisement costs, inspection and closing costs, legal and title insurance fees, broker fees, and cost of repairs required as a condition of the sale and taking place within 90 days.
Interest paid on mortgage debt up to $1 million is tax-deductible, and refinancing costs often qualify for tax deduction. If refinancing leads to a loan of greater value than the first mortgage's because significant improvements were made on the home, you should be able to deduct the cost of those improvements.
Certain energy-saving improvements to your home may qualify for tax credits, and all but the first $500 in damages caused by a natural disaster are tax-deductible. Finally, every homeowner needs to be aware that local property taxes may be itemized and deducted.
Job-Related or Business Deductions
If you are among the many retired persons who are planning to return to the workforce, you'll be glad to know that job-hunting costs are often tax-deductible. Qualifying costs can include those spent on resumes, job counseling, and travel.
If you are self-employed, whether part-time or full-time, you may qualify for many tax deductions including those for:
* Capital expenses
* Transportation expenses
* Vehicle depreciation
* Equipment costs
* "Bad debts"
* Home office expenses
All deductions claimed must be directly related to operating your business, and financial records should be accurate and complete.
Charitable Donations
Donations you make to qualifying charities and nonprofits are tax-deductible. Such contributions can total up to 50% of your Adjusted Gross Income.
For donated items other than cash, the amount of your deduction is based on the fair market value of the donated item. For an item donated for a fundraiser, the amount of your deduction, if you value the donated item at more than $500, will be equal to the amount of money raised through the sale or raffling off of your item.
If you volunteer for a charity, costs you incur while volunteering may qualify for tax deduction. For example, if you purchase cooking items or ingredients used in a charity's soup kitchen, you can claim those costs.
Retirement Plan Contributions and Investment Costs
For a married couple over 50, traditional IRA contributions up to $13,000 per year normally qualify for tax deduction.
While Roth IRA contributions are not tax-deductible, they are taxed before going into the account, and grow without further taxes. Funds eventually taken out of Roth IRA accounts remain tax-free.
Many investment-related fees, meanwhile, are tax-deductible as long as they—combined with the other items you itemize and deduct from your taxes—total at least 2% of your Adjusted Gross Income. Qualifying investment-related fees include accountant or financial planner fees, certain broker and attorney fees, and certain costs related to computer use.
Not easy, but well worth it …
It can be a chore to go through all your possible tax deductions to determine whether you're better off itemizing or settling for the standard deduction, but many retired Americans – determined not to hand over any more money than necessary to Uncle Sam – are thankful they took the time to weigh their options.
Source...