Top Tax Tips for Retirees
You'd think that filing taxes would get easier over time but unfortunately for retirees this just isn't the case. In fact, many retirees will face additional hurdles in their tax filing as a result of new sources of income and special deductions.
Here we provide some tax filing tips to help retirees overcome the most common difficulties in filing their post-retirement returns. Note that these are based on current tax law, as of April 2017. Should tax brackets and rates change, as has been proposed by President Trump and others, this information will also change.
TUTORIAL: Personal Income Tax Guide
Advantageous Tax Breaks
There are a number of great tax breaks for seniors so when you are filing your taxes, make sure you apply for every one you qualify for.The following may apply to you:
While no one really likes losses in their investment or real estate portfolio, these can be useful in helping to reduce the amount of income tax due. Also, any casualty or theft losses pertaining to your property can provide tax relief. Realizing the following types of losses should be considered in the given tax year to help offset gains or mitigate taxes:
|Security Losses (stocks, bonds, mutual funds, etc.)||Selling losing security positions can help offset taxable capital gains and qualify the taxpayer for loss carry-forward. (Read Selling Losing Securities for a Tax Advantage.)|
|Rental Real Estate Losses||Non-real estate professionals that pass an "active participation test" as real estate owners suffering from loss can deduct up to a loss allowance of $25,000. (Read Tax Deductions for Rental Property Owners.)|
|Annuity Losses||If an annuity is surrendered for a loss, the annuity owner can claim a loss deduction. (Read Taking the Bite Out of Annuity Losses.)|
|Casualty & Theft Losses||Owners can claim damages on Form 4684 for damaged, destroyed or stolen property. (Read Deducting Disaster: Casualty and Theft Losses.)|
Effective Withdrawal Strategies
When it comes to retirement income, how you withdraw funds during retirement from various savings vehicles can directly impact your taxes. Here are a few pointers to save on taxes:
Standard Deduction vs. Itemizing
When you stop working, you'll have to take a serious look at your situation to determine if you should itemize your deductions or simply take the standard deduction. Upon reaching age 65 or older, you'll receive an additional standard deduction allowance (on top of the regular standard deduction amount) if you elect not to itemize your deductions. For 2016 and 2017, the additional amounts are $1,550 for a single filer and $1,250 for a married or qualifying widow(er) filer. In addition, if you or your spouse is legally blind, you'll each receive another $1,250 allowance ($1,550 for single filer).
Some deductions such as medical expenses, long-term care premiums, mortgage interest, investment and property losses, and charitable contributions might be higher or the same during retirement. Therefore, you might want to continue to itemize your deductions on your federal tax return if your specific deductions exceed the standard deduction limits. (The receipts you cram into your wallet could be replaced with cash come tax season. Check out 10 Most Overlooked Tax Deductions.)
Credit for the Elderly or Disabled
You might be able to reduce your federal income tax by claiming the Credit for the Elderly or Disabled. The primary qualifications include the following:
The actual computation of the credit is a pretty simple five-step process. However, it goes beyond the scope of this article and requires the use of an IRS filing status table to determine the starting amount used in the calculation. (Also check out Give Your Taxes Some Credit.)
Taxation of Social Security
While it's nice to have some additional supplemental income during retirement, it's important that you fully understand how earned income and tax-exempt interest can affect your Social Security benefits. If you're married filing jointly and your provisional income exceeds $32,000 ($25,000 for single filers), then a portion of your Social Security benefits will be subject to federal tax.
Provisional income is the total income shown on your return (earnings from a job, interest, dividends, etc.) plus 50% of your net Social Security benefits, plus tax-exempt interest or certain tax-exempt fringe benefits or exclusions.
For example, Jim and Mary are both 68 years old and are retired. They file a joint return. Jim works a part-time job paying $12,000 per year. They have $7,000 in taxable interest/dividends and $15,000 in tax-exempt interest from municipal bonds. Combined, their net Social Security benefits are $18,000. Their provisional income is $43,000. This exceeds the $32,000 limit, so part of their Social Security benefits will be taxable.
To compute the exact amount of your taxable benefits, you should refer to IRS Publication 915. (Find out how to determine whether the tax exemption offered by "munis" benefits you in Weighing the Tax Benefits of Municipal Securities.)
Avoiding an Audit
While the odds of an actual tax audit are still fairly low, the IRS has increased the number of audits of high-income taxpayers, schedule C filers (business profit or loss), partnerships, corporations, those who use tax shelters and S corporations. Many audits result from errors or omissions in the recording of figures, itemized deductions and other expenses exceeding IRS targets, as well as excessive tax-shelter losses. Double checking your return for errors and avoiding excessive deductions could help avoid most audits. Here are a few record-keeping tips:
The Bottom Line
Filing your taxes during retirement can be just as time consuming as when you were employed, so you'll still need to keep an organized filing system for all of your tax documents to help you better determine whether to itemize your deduction or take the standard return. Preparing for your tax filing can be simple if you work to stay organized throughout the year, and keep abreast of changes to tax laws that could affect your deductions and credits.
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