Millions of people retire every year and this past year the pandemic has pushed more people into retirement. Whether the retirements were voluntary or involuntary, there are tax breaks out there that will help stretch out your retirement savings and save you money. Here are some overlooked tax breaks for retirees to understand and take advantage of.
When you turn 65, the IRS rewards you with a higher standard deduction. A single 64-year-old taxpayer can claim $12,550 on his/her 2021 tax return, while a single 65-year-old taxpayer will get a $14,250 standard deduction. An extra $1,700.
Couples can also take advantage of this. If only one spouse is 65 or older, an extra $1,350 for 2021 can be deducted for standard deductions. If both spouses are 65 or older, an extra $2,700 can be claimed.
The higher standard deduction translates to money saved if you don’t itemize your tax deductions.
Spousal IRA Contribution
If you’re retired, married, at least 50 years old, and your spouse is still working, he or she can still contribute up to $7,000 a year to either a traditional or Roth IRA that you have. Your spouse just needs to have enough earned income to contribute to your account.
Just remember, combined contributions to your IRA or spouse’s IRA cannot go over $13,000 if only one of you is 50 or older, or $14,000 if both of you are at least 50 years old.
Qualified Charitable Distributions
If you reach the age of 70 1/2, you can transfer any amount up to $100,000 directly from your IRA to a qualified charity and not owe income tax on the transaction, even if you don’t itemize. This is called a qualified charitable distribution (QCD) and also counts toward your required minimum distribution.
If you are married, your spouse can transfer an additional $100,000 to charity from his/her IRAs. The transfer is also not taxable and counts toward their required minimum distribution.
However, if you do itemize your deductions, you cannot claim the tax-free transfer as a charitable deduction on Schedule A.
Give Money to Your Family
Giving money to your family is tax-free to an extent. Under the annual gift tax exclusion, you are allowed to give up to $15,000 annually to someone without worrying about the gift tax. Your spouse can do the same. Since the annual exclusion is per person, you and your spouse together can make a tax-free gift of up to $30,000 to as many people as you’d like.
For example: if you are married and your child is married and has two grandchildren, you and your spouse can give $30,000 to your child, his/her spouse, and each grandchild. That is $120,000 of tax-free money without having to file IRS form 709.
Deduct Medicare Premiums
The IRS allows self-employed individuals the ability to deduct their Medicare premiums (including Part B, Part A – for those that pay a premium for it – and Part D) from their federal taxes.
This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses. However, there are certain exceptions that can prevent you from claiming this deduction.
If you would like more information or guidance on taking advantage of these tax breaks, please contact our professionals at The Innovative CPA Group at 203-489-0612 or contact us online.