The life of a retired person should be nothing but sailboats and weekend golf outings. (That may be true if you made a fortune in your career. Most of us will have to settle for drives in the country or visits to the Y swimming pool.) But even those retirees with enormous wealth face the same tax challenge every year as the rest of us: trying to find the deductions, credits and tips that make our tax liability manageable.
So let's look at some unique benefits offered to those who have left the workforce. We'll also give a few pointers to older taxpayers in general. First up? Don't assume that itemizing your deductions is the biggest bang for your buck.
10: Standard Deduction Is Higher
When we talk about deductions, there are two ways to go. A standard deduction is the flat rate that the government gives taxpayers based on their filing status. When you itemize deductions, on the other hand, you're counting up all sorts of miscellaneous expenses to see how much you can knock off your tax liability.
As a general rule in this article, we're mostly talking about itemizing deductions. But here's a good trick for retirees: The standard deduction for people over 65 is actually higher than everyone else's. While most single taxpayers get $6,200, single taxpayers older than 65 get an extra $1,550. Married taxpayers get $12,400, and those over 65 receive $1,200 more. Itemizing is great if you have a big deduction that counts for a lot -- mortgage interest, say. But you might not have as much mortgage interest to itemize if you own your home outright or are close to paying off your mortgage. The standard deduction might just be the best plan.
9: Medical and Dental Expenses
As we said, you can choose to itemize your deductions rather than take the standard cut -- and it is possible your expenses might make it worthwhile, if you're retired. Realistically, a lot of older folks find themselves paying for health care at a faster (and more expensive) clip than they did in their younger days. And while it's not as easy as simply writing off every cent you spend, you can still get yourself a sizable tax cut if you itemize.
In 2013, the tax code was changed so that people 65 and under could only deduct medical and dental expenses in excess of 10 percent of their gross adjusted income. (So if you made $50,000, you could deduct any medical costs over $5,000.) But over the age of 65, you're allowed to deduct any costs over 7.5 percent. So in other words, for that same $50,000, you could now deduct anything over $3,750 [source: Fishman].
8: Business Expenses
We know what you're thinking: You're retired, so how can you have business expenses? Don't think we're trying to pull a fast one on you. You might be out of the full-time game, but that doesn't necessarily mean you don't have jobs or work to deduct on your tax return. No, we're not advocating that you make up a fake business and write off the cost of your home office. But if you are doing freelance work or working as a consultant or contractor for anyone, that home office deduction might be yours to take.
If you have self-employed income, do remember that you'll still have to pay taxes on the income. But you also get to write off a whole host of businesses expenses, and that's without itemizing. From mileage to business equipment, you could deduct quite a bit from your tax bill.
7: Credit for the Elderly or Disabled
Don't forget that you might qualify for the IRS's elderly or disabled tax credit. It's nonrefundable, meaning that it will take money off your tax liability, but it won't roll over into a refund if you have no tax bill. (In other words, if the credit is more than your taxes due, don't expect a check for the difference, but enjoy not having to send a check to Uncle Sam.)
A few qualifications apply, which -- you might have guessed -- start with being age 65 or older or having a disability. If you're under 65 and claiming on disability alone, you need to have a permanent and total disability before retirement. You'll fill out a schedule R form to help you figure out the credit due, but the IRS can also calculate it for you. Depending on income and filing status, the credit might be different based on your circumstances [source: IRS 524].
6: Sell Your House
Retirement is the time that a lot of folks consider downsizing into a smaller space -- or looking for their dream home or retirement community. If you've been in the same place for ages, you might find that selling your house turns a profit -- and in turn, gives you a tidy tax break.
If you've lived in your home for two of the five years before you sell the place, you don't have to pay any tax on the profit you make in the sale. Now, there are limits; the break is only eligible for up to $250,000 in profit for single taxpayers and $500,000 for married taxpayers filing jointly [source: Fishman]. But that's no small amount of income to add to your purse tax-free. Now might be a great time to consider selling the house to inject your bank account with a bonus and save money on this year's taxes.