Let’s update some two-thousand-year-old tax advice—Give to Caesar what belongs to Caesar, but don’t give him more than that. Today, tax deductions and credits help determine how much Caesar gets. As an old guy told me a long time ago, “If it’s in the IRS code, it’s there to be used.”
Unfortunately, there are tax breaks available to retirees that get overlooked. Here are some of the most common.
Higher standard deduction
For years, the IRS has provided a higher standard deduction for people who reach and exceed the age of 65.
For the 2020 tax year, the standard deduction for people who don’t itemize is $12,400 for single taxpayers and $24,800 for couples filing jointly. But if you’re over the age of 65, singles get an extra $1650 making their standard deduction $14,050 and married couples filing jointly get an additional $1300 each making their standard deduction $27,400.
Health insurance premiums
If you’re self-employed and your business made a profit, you may be able to claim as a business expense anything you paid for health insurance premiums, including Medicare. According to IRS Publication 325, “You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction.” Based on the monthly Medicare Part B premium for 2020 ($144.50), that could mean a deduction of $1735.
Non-itemized charitable donation
Until now, you had to itemize your charitable deductions to receive a tax benefit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act changed that, at least temporarily. Right now, even if you don’t itemize your deductions, the IRS allows you to take the standard deduction and claim a $300 cash donation to charity.
According to the IRS, “This change allows individual taxpayers to claim a deduction of up to $300 for cash donations made to charity during 2020. This deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.”
When the SECURE Act (Setting Every Community Up for Retirement Enhancement) took effect January 1, 2020, the age cap was lifted on who could contribute to a Traditional IRA. Now, no matter what your age, as long as you have earned income you can make a tax-deductible contribution. The contribution cannot exceed $7,000 for anyone over the age of 50, or what you earned if it is less than $7,000.
Spousal IRA contributions
Additionally, because you are still working and earning income, your non-working spouse, can also make a tax-deductible contribution equal to the one you make.
Everything mentioned up to now has been a tax deduction meaning you get to write off a percentage of the total amount. The Saver’s Credit is a tax credit, which reduces taxable income dollar-for-dollar because you contributed to a qualifying retirement account.
The Saver’s Credit gives a tax break to low-and-moderate-income taxpayers. It’s in addition to other tax benefits for saving in a retirement account. Unfortunately, only 12% of American workers with annual household income below $50,000 know about the Saver’s Credit.
To qualify, you must:
- Be age 18 or older
- Not be a full-time student
- Not be claimed as a dependent on someone else’s tax return
- Have made your retirement contribution during the tax year for which you are filing your return
- Meet the income requirements
In 2020, the maximum adjusted gross income requirements are:
- $65,000 for a married couple filing jointly
- $48,750 for a head of household, and
- $32,500 for all other taxpayers.
The maximum credit you can claim phases out as your income increases.
The Saver’s Credit can be claimed in you make contributions to a:
- 457 Plan,
- Simple IRA or
- SEP IRA
- Traditional IRA
- Roth IRA
You cannot claim employer contributions to any employer-sponsored plan/accounts.
So, retirees, be aware of these often-overlooked tax deductions. Look for more. And make sure you don’t give Caesar any more than is required.