While retirement does not exclude you from filing taxes, it frequently allows you to claim valuable tax credits and deductions.
In some instances, these tax breaks are available to both employees and retirees; nevertheless, retirees are sometimes unaware that they may qualify. In other cases, these tax incentives are essentially reserved for senior taxpayers, meaning that younger taxpayers may not be aware of them until later in life.
The following are a few instances of federal income tax advantages that retirees frequently overlook.
Traditional IRA Contribution by Spouse
Even if you can only fund an IRA with salary or other forms of earned income, your spouse may be able to do so with their income. If one of you is employed, you can contribute to the retirement savings of your non-working spouse. Contributions to a traditional IRA made by your spouse may also be eligible for a tax benefit if you fulfill certain income and other criteria.
Qualified Donations to Charity
Taxpayers seeking a charitable deduction must itemize their deductions instead of taking the standard deduction. Additionally, standard deductions increased following the federal Tax Cuts and Jobs Act of 2017, which means fewer people now benefit from itemizing. However, some retirees might be able to avoid this successfully.
Funds from an IRA can be transferred to a charity and used to meet your required minimum distribution (RMD) requirement without being treated as taxable income once you reach the age of 70½. The IRS refers to this as a “qualified charitable distribution.”
Deductions for Medical Insurance Premiums
Health insurance premiums paid by self-employed individuals may be deductible on their tax returns. The following, as stated by the IRS:
“Qualified long-term care insurance and medical and dental insurance for yourself, your spouse, and your dependents may all be tax-deductible expenses. As long as the Medicare premiums are paid freely, they can be counted toward the deduction.”
As an illustration, the standard monthly premium for Medicare Part B in 2021 was $148.50 per month, representing a potential write-off of $1,782.
Because it isn’t targeted toward retirees, the saver’s credit may go unnoticed. However, this benefit is available to all taxpayers who maintain a retirement savings account. Retirees who can put money in a retirement account can take advantage of this benefit, provided they otherwise qualify for it.
So, if you are currently putting money into a retirement plan, make it a yearly ritual to see if you are eligible for the saver’s credit. Married taxpayers filing a joint return may lower their tax bill by up to $2,000 or $1,000 if they’re single.
Increases in the Standard Deduction
A higher standard deduction could lower your tax bill for free if you’re over age 65 and don’t itemize your tax deductions.
Generally, the standard deduction for seniors goes up by $1,350 per married person or $1,700 per single person. The Internal Revenue Service (IRS) defines a “senior” as a taxpayer born on or before January 2, 1957, and whose tax return is due on April 15, 2021.
If you’re one of two married seniors over age 65 and both over age 65, you’ll get an additional $2,700 in tax-deductible income. The amount of money they will save on taxes will be directly proportional to their income level; nevertheless, it will result in a lower base amount that they report.
Non-itemized Charitable Deductions
Non-itemizers can claim a new charitable deduction starting in the 2021 fiscal year. Because of the CARES Act of 2020, taxpayers who claim the standard deduction in 2020 will be able to deduct up to $300 in charitable contributions made during the year.
This tax deduction has been extended and expanded through 2021. So, retirees who made charitable contributions last year can take advantage of the tax benefit this year.
Traditional Individual Retirement Accounts (IRAs) Allow for Tax-deductible Contributions
The retirement savings cap on traditional IRAs was eliminated due to the Secure Act of 2019, which was signed into law by President Donald Trump (IRA).
Therefore, beginning of the 2020 tax year, retirees with earned income, such as from part-time employment, can save money in this type of account regardless of their age and deduct the contribution from their taxes.
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