Rob Yeend

Newly Retired? Don’t Overlook These Commonly Missed Tax Breaks

Newly Retired? Don’t Overlook These Commonly Missed Tax Breaks

by | Jan 25, 2021 | Articles, blog, Finance, For Individuals, Newsletter Article, Personal, Retirement

2 minute read

With retirement comes the challenge of stretching out your savings for the rest of your life, so it’s more important than ever to take advantage of every available tax break. Surprisingly, there are some tax breaks for seniors that are often missed simply because they don’t know about them. If you’re newly retired or on track to retire soon, keep these tax breaks in mind.

Bigger Standard Deduction

A higher standard deduction is a free potential reduction in your tax bill, if you don’t itemize your tax deductions. Seniors generally get an increase of $1,300 per person (if married) or $1,650 per person (if single) from the usual standard deduction. Two married seniors, for example, could subtract an extra $2,600 from their taxable income.

Health Insurance Premium Deduction

If you are self-employed, or become self-employed after leaving the workforce, you may be able to deduct your premiums for Medicare Part B and Part D, or other health insurance plans, as a business expense. For instance, the Medicare Part B standard monthly premium for 2019 was $135.50 per month, which is a possible write-off of $1,626. A note of caution: This deduction can’t be claimed if you are qualified to be covered under any employer-subsidized health plan (for example, if you have retiree medical coverage, or if your spouse’s employer offers family medical coverage).

Spousal IRA Contribution

You can contribute to an individual retirement account (IRA) as long as you have earned income, including a spouse’s income. If you’re retired, your working spouse can contribute up to $7,000 a year to an IRA that you own. Spousal contributions to a traditional IRA (as opposed to a Roth IRA) also qualify you for a tax deduction, assuming you meet other eligibility requirements.

Saver’s Credit

If you are still contributing to a retirement account, you are potentially eligible for the Saver’s Credit, which could reduce your taxes by up to $2,000-$4,000 for married taxpayers filing a joint return.

The RMD Workaround

Although required minimum distributions (RMDs) weren’t an obligation in 2020 due to Covid-19, retirees taking RMDs from their traditional IRAs moving forward may have an extra option for meeting the pay-as-you-go demand.

Wait until December to take the RMD if you don’t need it to live on during the year. Request that your IRA custodian keep back enough money from your RMD to pay your entire tax bill on all your income sources for the year. This move frees you from the task of making quarterly estimated tax payments and can help you avoid underpayment penalties. Waiting until closer to the end of the year gives you a better estimate of your actual tax bill, and you can adjust the amount to withhold to cover that bill.

Qualified Charitable Distribution

After age 70 ½, you can do what the IRS calls a qualified charitable distribution (QCD): transfer up to $100,000 each year from your traditional IRAs directly to charity. The transfer will count toward your RMD without counting as taxable income for you. Note that if you itemize, you aren’t eligible to also claim the tax-free transfer as a charitable deduction on Schedule A.

 

About the Author

Rob is a CPA and has been in public accounting since 1993 after graduating from Ball State University with a Bachelor of Science degree in accounting. Rob became co-owner of the firm in 2003. Rob provides services to many types of industries; including, manufacturing, trucking, construction, service, and retail.

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