It’s that time of year again. There are new things to consider this income tax season and no, there is no automatic extension to file this year due to the pandemic — unless you specifically ask for it.
For seniors and retirees, an estimated 30% of income will go to health care premiums, prescription drugs and other medical expenses. These expenses may be tax-deductible. If you itemize deductions (forgoing the standard deduction), you may be able to deduct out-of-pocket medical/dental expenses on Schedule A, but only in excess of 7.5% of your adjusted gross income (AGI).
Seniors should be aware if selling a home. You likely have gained substantial equity in recent years. If you lived in your home for at least two of the five years prior to selling, you may not have to pay taxes on any profit. Tax law allows a single filer to claim up to $250,000 in profit on a home sale with no taxes, and up to $500,000 for a married couple filing together.
If you are retired or semi-retired, you can still make tax-deductible contributions to retirement accounts like IRAs and 401(k)s. This is perhaps one of the best senior tax breaks available, as you may need to live off your retirement funds. Tax law allows people over 50 to contribute more to retirement accounts than those under 50. For example, a married couple over 50 can contribute as much as $26,000 to an IRA (for the 2021 tax year) and deduct that amount from their income tax.
Perhaps the best way for seniors to earn income is interest, dividends or capital gains on investments. This income is taxed at a much lower rate, typically 15%, and not subject to taxes for Social Security or Medicare. Expenses related to investments — financial planning or legal fees for advice, for example — that exceed 2% of your AGI may qualify as an itemized deduction.
Seniors who own a business with expenses may be able to deduct some or all expenses that are necessary and reasonable. Typical expenses include business travel, business equipment and the costs of office space, even in the home.
Charitable contributions by seniors are permitted as an itemized deduction, but there are limits. Cash donations may be deducted up to an amount equal to 60% of your AGI. In addition, donation of property can generally be deducted at its fair market value. The deduction of donated property like a car or boat — valued at $500 or more — that will likely be sold is limited by the gross proceeds from the sale.
My advice is to seek out a good tax adviser.
Sources: IRS.gov, AARP, thebalance.com, aging.com
Al Brandenburg is a member of Maricopa Community Advocates.
This column was first published in the March edition of InMaricopa magazine.