Many older Americans aren't taking advantage of tax deductions that could help them build savings for retirement, experts warn.
Major changes made by the Internal Revenue Service (IRS) in recent years may have confused some taxpayers, says accountant Tom Wheelwright.
Trump-era legislation introduced by the Tax Cuts and Jobs Act of 2017 brought sweeping changes to the tax landscape. Then, in 2022, President Biden made further changes under the Inflation Reduction Act.
These laws have led to new tax benefits and changed existing rules.
Here's a look at some lesser-known tax deductions that prove lucrative for seniors. Together they amount to hundreds or thousands of dollars – and in some cases tens of thousands for wealthier seniors.
Major changes made by the Internal Revenue Service (IRS) in recent years may have confused some taxpayers, says accountant Tom Wheelwright.
Donate to a good cause
Donating stocks – or even cryptocurrency – that have appreciated in value to charity can be a good way for seniors to maximize their tax benefits, says Wheelwright, founder and CEO of WealthAbility.
“You get a deduction and you don't have to pay tax on the capital gain,” he told DailyMail.com.
Many people also overlook charitable donations that have other tax benefits than just a standard deduction, he said.
“There are many donations where you get tax credits, along with a deduction or instead of a deduction,” says Wheelwright.
Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction in your tax liability. Tax deductions, on the other hand, reduce how much of your income is subject to taxes.
“There are a lot of small donations you can make that will have an impact on your state taxes, and they can also have an impact on your federal taxes,” Wheelwright said.
The credits offered vary by state, so be sure to check what's available where you live, he said.
“For example, Arizona allows a tax credit of more than $1,000 on combined proceeds for gifts to foster care charities, more than $800 for gifts to other qualified charities, and more than $1,300 for gifts to qualified school education programs.”
If you don't itemize on your federal tax return, you won't get a deduction for charitable donations, Wheelwright added, so credits may be worth looking into if they're available in your state.
Donating stocks (or even cryptocurrency) that have increased in value to charity can be a great way for seniors to maximize their tax benefits
Qualified Charitable Distribution
At a certain age, Americans must begin taking an annual withdrawal – known as a required minimum distribution (RMD) – from their retirement plan.
The Secure 2.0 Act, which came into effect this year, raised the age at which people must start making contributions to 73.
If you are 73 or older, you may want to consider a qualified charitable distribution (QCD), Wheelwright said.
This is a donation you can make directly from your IRA account so you can avoid the taxes associated with a withdrawal and reduce the number of RMDs you need to withdraw.
“But if you're not old enough to need an RMD, then it's not really of much use,” says Wheelwright.
“In that case, you're better off making an appreciated stock or cryptocurrency donation.”
Additional standard deduction
Many taxpayers will claim the standard deduction to reduce their income by a preset amount: $13,850 for single filers and $27,700 for married, joint filers in 2023.
Taking the standard deduction makes sense if the amount exceeds your itemized expenses.
And in the 2023 tax year, Americans who are over 65 or blind will meet certain targets criteria as described by the IRS are now eligible for an additional standard deduction.
The additional standard deduction is $1,850 for single filers or those filing as head of household, and $3,000 for married couples filing jointly if each spouse is over age 65. This increases the total amount to $15,700 for single filers and $30,700 for married couples.
Medicare premium deduction
“If you're self-employed, your Medicare premiums are fully deductible, even if you don't itemize,” says Wheelwright.
A Medicare insurance premium is an insurance premium and is eligible for the self-employment health insurance deduction, he added.
Wheelwright encourages self-employed seniors to talk to an expert about their tax matters.
'A self-employed person or someone with a business should sit down with a tax professional. They should not try to do this on their own,” he said.
IRA Contributions by a Spouse
Many Americans don't know they can deposit their earned income into the IRA account of a low-earning or non-working spouse if they file a joint tax return as a married couple, experts say.
This works the same way as a traditional IRA, which reduces pre-tax income, and does not work for a Roth IRA, which is funded with money after it is taxed.
“This IRA strategy for spouses can double retirement savings for the year while reducing a couple's tax burden,” Nathan Anderson, certified financial planner at Prairiewood Wealth Management, told me. The Wall Street Journal.
For tax year 2023, married couples filing jointly can contribute $6,500 per individual to a spousal IRA, for a total of $13,000.
And if they are both over age 50, each individual may make an additional catch-up contribution of $1,000, up to a total of $15,000.
The IRS has specific rules about who can benefit — including that a working spouse must earn at least as much money as he contributed to both of the couple's IRAs.