More Tax Deductions for Retirees
5: Income Without Penalty
We don't usually think of retirement accounts having big deductions when you're already retired. When talking about lowering tax bills, you might find that professionals advise those still working to invest in retirement accounts; often, you can put money in them tax-free, for instance, which saves you money every April.
But remember that many accounts will only let you take distributions before a certain age if you pay a penalty. If you're over 59 and a half, you're allowed to take income from your retirement plans without any penalty [source: Francis]. While it's not actually a deduction, it's really useful to take income from the accounts on which you're not paying taxes.
But be warned: Certain IRAs and 401(k) plans will tax you on the income you take out. (After all, you didn't have to pay taxes on it when you contributed it to the plan in the first place.) So, limit your income from those accounts to only what you really need, and take more money from the nontaxable distribution accounts.
4: Retirement Accounts: Put More In
We're not done with retirement accounts just yet. Who knew that saving for retirement could actually equal a tax break in your golden years? (Well, pretty much any accountant, wealth planner, tax preparer or regular Jane with tax knowledge. Still. Don't feel bad if you're just learning this stuff.)
Here's the deal: Before a certain age, you're only allowed to contribute a certain amount to your retirement plans (that includes 401(k)s, IRAs and Roth IRAs). For instance, 401(k)s let you contribute up to $17,500 a year if you're under 50, and you can add a whopping $5,500 more if you're over 50. That's pretty cool, but 401(k)s usually only apply to working stiffs getting money taken out of their paychecks with an employer plan.
IRAs work a little differently. You can contribute to an individual IRA even if you're not working, and although the limit is $5,500 for those under 50, it rises to $6,500 if you're over 50. Traditional IRAs include deductible contributions -- meaning you can write them off – which can add up to $6,500 in contributions, depending on your plan and circumstance [source: IRS Retirement].
3: Charitable Donations
Charitable giving is one tax deduction that's often mentioned but rarely taken advantage of to the full extent. As you enter retirement, it might be a good time to think about ways that your wealth could serve noble causes -- with the added benefit of nobly serving you less tax liability.
Be aware that there are limitations to charitable contributions. Remember that they only apply if you're itemizing your expenses, for one. Also, you're generally only allowed to deduct up to 50 percent of your adjusted gross income as charitable contributions. Don't forget that donating items -- cars, for instance -- are also deductible. (You can either figure out the fair market value and deduct that or write off the cost of the profit if the organization sells it [source: IRS 526].)
But that's not all. Do you volunteer for an organization you drive to? Don't forget you can write off your mileage (or take the 14-cent-per-mile charitable rate). Even if you're traveling on behalf of a charitable organization, you can write off expenses. Not a bad way to spend retirement, after all [source: IRS 526].
2: Investment Expenses
A lot of retired folks depend on their investments for income. That's excellent news, tax-wise, because dividends and capital gains aren't taxed like the regular income you earned toiling for your big job; it's charged at a much lower rate. Depending on your tax bracket, these forms of income are taxed anywhere from 20 percent to...nothing at all. Not too shabby.
Obviously, it's terrific if you can use that investment money as income -- and thus give yourself a tax break. But it gets even better, because if you itemize your expenses, you can write off a load of items that come with investment services. (That's so long as the expenses -- along with all your other itemized deductions -- exceed 2 percent of your adjusted gross income.) That includes any fees you pay to a broker or financial institution to collect your investment income, and could even include the cost of hiring a financial planner to help you. Needed to call a lawyer to ask about some legal implications of investments? Write that off, too. Take advantage of those investments through income distribution and deductions, and your tax return will show the wisdom of your years.
1: Understand Social Security
Now, it's not strictly a deduction, but we'd be remiss if we didn't discuss the implications of Social Security on a retiree's income and taxes. A lot of folks assume that -- because Social Security was withheld from their paychecks in the first place -- it's income that they receive tax-free.
Not exactly. Social Security is eligible for taxation, up to a certain limit -- and only if you make a certain amount of income. While there's a formula the IRS gives you to figure out how much you'll be taxed on Social Security, know that you'll never have to pay taxes on more than 85 percent of your Social Security earnings. If you file as a single person, you don't have to pay taxes at all if your combined income is below $25,000 ($32,000 for married folks filing jointly [source: SSA]). Keep in mind that your combined income is calculated by adding together your adjusted gross income, your nontaxable interest and half your Social Security benefits.
So no -- it's not a tip you can write off as a deduction. But being aware of how Social Security can affect your taxes might save you a lot of money in retirement.
Author's Note: 10 Tax Deductions for Retirees
Remember that Roth IRAs allow you to receive nontaxable income when you're retired. (That's because you're being taxed on the money when you contribute it.) So, if you want to receive more money without having to pay more taxes on Social Security, consider taking the bulk of your income from Roth withdrawals. They won't count toward the combined income that is used to determine the percentage of Social Security taxation.
- Fishman, Stephen. "Top Seven Tax Deductions for Seniors and Retirees." Nolo. 2014. (Nov. 5, 2014) http://www.nolo.com/legal-encyclopedia/top-tax-deductions-seniors-retirees-29591.html
- Francis, David. "Tax Tips for Retirees." US News and World Report. Feb. 1, 2012. (Nov. 5, 2014) http://money.usnews.com/money/personal-finance/articles/2012/02/01/tax-tips-for-retirees
- Internal Revenue Service (IRS). "IRS Announces 2014 Pension Plan Limitations; Taxpayers May Contribute up to $17,500 to their 401(k) plans in 2014." Oct. 31, 2014. (Nov. 5, 2014) http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014
- Internal Revenue Service (IRS). "Publication 524." 2013. (Nov. 5, 2014) http://www.irs.gov/publications/p524/index.html
- Internal Revenue Service (IRS). "Publication 526." 2013. (Nov. 5, 2014) http://www.irs.gov/pub/irs-pdf/p526.pdf
- Internal Revenue Service (IRS). "Retirement Topics - IRA Contribution Limits." Oct. 23, 2014. (Nov. 5, 2014) http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
- Internal Revenue Service (IRS). "Tips for Seniors Preparing Their Taxes." Sept. 15, 2014. (Nov. 5, 2014) http://www.irs.gov/Individuals/Seniors-&-Retirees/Tips-for-Seniors-in-Preparing-their-Taxes
- Merkel, Steven. "Top Tax Tips for Retirees." Investopedia. 2014. (Nov. 5, 2014) http://www.investopedia.com/articles/tax/11/tax-tips-for-retirement.asp
- Social Security Administration (SSA). "Benefits Planner." United States Government. (Nov. 5, 2014) http://www.ssa.gov/planners/taxes.htm
- TurboTax. "Guide to Schedule R: Tax Credit for Elderly or Disabled." Intuit. 2013. (Nov. 5, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Retirement/Guide-to-Schedule-R--Tax-Credit-for-Elderly-or-Disabled/INF19377.html
- TurboTax. "Tax Tips After You Retire." Intuit. 2013. (Nov. 5, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Retirement/Tax-Tips-After-You-Retire/INF23182.html
HowStuffWorks looks at the FIRE movement (financial independence, retire early) and finds out how adherents retired so early.