By Cristina Wiebelt-Smith, CPA, Wealth Advisor
Part of our financial planning process is looking over tax returns for planning and savings opportunities. Sometimes we hear comments like, “I’m retired, so I don’t need tax planning” or, “I don’t make enough money to need tax planning.”
It’s not too late! There are tax breaks even if you are retired and tax strategies are an important part of a financial plan, no matter how old you are or how much money you have.
- 1. Extra Standard Deduction for 65 and older or legally blind: If you’re 65 or older and single, you get an additional $1,750 deduction for a total standard deduction of $14,700. If you’re married filing jointly, you get an additional $1,400 for each spouse over 65 so that could mean an additional $2,800 deduction for a total standard deduction of $28,700.
- If you’re under 65 and legally blind, you also get the additional $1,400 Married / $1,750 Single deduction.
- If you’re both 65 and blind, the additional deduction is doubled!
- 2. IRA Contributions: Even if you’re retired, there’s still an opportunity to contribute to either a traditional or Roth IRA if your spouse is still working. For 2022, if your spouse has earned income, including self-employment income, they can generally contribute up to $6,000 to their IRA as well as $6,000 to your IRA. If you don’t want or need to contribute to both IRAs, you can just contribute to the retired spouse’s IRA.
- 3. IRA Catch Up Contributions for people 50 and over: You can contribute an additional $1,000 to a traditional or Roth IRA. For example, in 2022 you can contribute $7,000 instead of $6,000 if you’re 50 or over. If both spouses are over 50, the total contributions can be up to $14,000.
- 4. Medicare Premiums Deduction for Self-Employed: We’ve seen a trend of retirees becoming consultants for their former employers and sometimes for a new company. This opens a whole new set of deductions that are available.
- You can deduct premiums for Medicare Part B and D, supplemental policies, and Medicare Advantage plans as Self-Employed Health Insurance. You may also be able to deduct a portion of Long-Term Care Policy premiums. You do not have to itemize to take advantage of this deduction. There are limitations if your spouse is eligible for family coverage under an employer provided health insurance plan.
- 5. Medicare Premium Deduction for State Taxes: State tax deductions are often overlooked once the federal tax return is complete. Some states, including Missouri, have quite a few deductions that you might be eligible for, and one is health insurance premiums.
- You can deduct Medicare Premiums for state purposes even if you don’t itemize. This includes Part B and D, supplemental polices or the Advantage plan. It may also include premiums for marketplace insurance, private health insurance and long-term care premiums that aren’t provided under an employer plan.
- 6. Tax Credit for Dependent Care: Most people think of young children when they see this credit but adults can also qualify. If you have pay someone to care for a spouse or parent so you can work, look for work or go to school, you might be eligible for the credit. The spouse or parent must be mentally or physically unable to care for him or herself and live with you for more than half the year.
- 7. Tax Credit for Lower Income Individuals: Technically this is called the “Tax Credit for the Elderly and Disabled”, though we contend that 65 is not elderly!
- Provides a credit between $3,750 and $7,500 for taxpayers 65 or older and those retired permanently and totally disabled with Adjusted Gross Income (“AGI”) between $17,500 – $25,000.
- There are additional complicated rules so if you meet these first requirements, ask your tax preparer if you think you might be eligible.
- 8. State Tax Deductions for Social Security, Pensions and Other Retirement Income: As I mentioned above, state tax returns are often an afterthought but there are some good tax breaks for retirees in a lot of states. Here are a couple examples.:
- Missouri has deductions for private and public pensions, social security and disability income and military retirement benefits.
- Iowa’s governor recently passed new legislation excluding retirement income from tax beginning in 2023, distributions from IRAs, SEP, SIMPLE and Keogh plans, certain pensions, Roth conversion income and more.
Would you like to discuss what tax breaks might be available to you in your unique situation? Schedule a conversation.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.