When you’re retired and on a fixed income, tax mistakes can have lasting repercussions. Keep these tax filing tips in mind when tax season comes around.
Though the United States government offers a number of different tax breaks to retirees, filing taxes is no less stressful. In fact, when you’re retired and on a fixed income, tax mistakes can have lasting repercussions. Keep these tax filing tips in mind when tax season comes around.
You may not need to itemize for deductions
The IRS says that “If you do not itemize your deductions, you can get a higher standard deduction amount if you and/or your spouse are 65 years old or older. You can get an even higher standard deduction amount if either you or your spouse is blind.” If you’re single, this amounts to an extra $1,600 added to the standard deduction you would otherwise be eligible for, and if you’re married, an extra $1,300 for each of you that qualifies.
Unless you have a very large amount of expenses that need to be itemized, this will help simplify the tax filing process for you and get you more money back. “Most older taxpayers find that their standard deduction plus the extra standard deduction or age works out to be significantly more than any itemized expenses they could claim,” tax law expert Beverly Bird writes in an article for The Balance.
And here’s an interest fact that can help you: Though you would normally need to turn 65 by the last day of the tax year, you still qualify if you were born on January 1.
Remember minimum distribution requirements
If you have a traditional IRA retirement account, you will need to take Required Minimum Distributions from it every year to avoid tax penalties. “Withdrawals from tax-deferred accounts will be taxed as ordinary income,” Rodney Brooks warns in an article for the U.S. News’ Money. This has the potential to raise your taxable income and push you up into a higher tax bracket, so make sure to withdraw the correct amount each year to avoid a 50 percent penalty.
If you don’t need the money, another option is available: Give it to charity straight from your retirement account. This is especially advantageous because while it will count toward your RMD, it won’t count toward your income. “You don’t have to donate the entire required minimum distribution,” Brooks writes. “You can donate a portion of your required withdrawal and receive the rest in income.”
Take advantage of the tax credit for the elderly and disabled
Possibly the most significant tax break available to seniors and retirees is the Credit for the Elderly or Disabled. According to Bird, this credit “can wipe out some, if not all, of your tax liability” if you end up owing the IRS. The credit is based on your age, filing status and income, and requires you to fill out Form 1040 or Form 1040A.
Deduct Medicare premiums
Whether or not you itemize, you may be able to deduce Medicare premiums when filing taxes. “If you become self-employed…after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (Medigap) policies or the cost of a Medicare Advantage plan,” writes tax expert Kevin McCormally in an article for Kiplinger. The deduction is also not subject to the adjusted gross income threshold that applies to itemized medical expenses for people aged 65 and older.
When filing taxes, there’s a lot to take into account whether young, aging, retired or disabled. The very first step you should take is to schedule a meeting or conference call with a tax advisor or financial advisor to ensure you get through this tax season — and all the ones to come after — as smoothly as possible.