Additional Coverage:
- 8 Tax Deductions Retirees Always Forget (Including One Worth $3,000+) (financebuzz.com)
Don’t Leave Money on the Table: Essential Tax Deductions for Retirees
Many retirees mistakenly believe their tax obligations will automatically shrink once they stop working. However, this isn’t always the case, and overlooking key deductions can cost hundreds, or even thousands, of dollars, especially when living on a fixed income. Understanding which tax breaks you qualify for can significantly reduce stress and improve your financial planning in retirement.
Before filing your next return, take a moment to review these often-forgotten tax deductions that can benefit retirees.
1. Medical and Dental Expenses Exceeding 7.5% of Your AGI
For retirees managing higher healthcare costs, this deduction can be a game-changer. The IRS allows itemizing taxpayers to deduct qualified medical expenses that surpass 7.5% of their adjusted gross income (AGI).
This threshold can be easier to meet in retirement, as income may be lower. Eligible expenses include doctor visits, surgeries, prescriptions, dental care, and long-term care services.
For some, especially after major medical procedures, this deduction alone could exceed $3,000.
2. State and Local Taxes (SALT) Deductions
Itemizing retirees can deduct eligible state and local taxes, including property, income, or sales taxes, on their federal return. Notably, the SALT deduction cap is set to increase from $10,000 to $40,000 between 2025 and 2029 under the One Big Beautiful Bill Act (OBBB). This significant increase can make itemizing far more attractive than the standard deduction for many retirees, particularly those in high-tax states or with substantial property tax bills, leading to a notable reduction in federal taxable income.
3. Charitable Contributions
If you’re a retiree who donates to qualified charities and itemizes, these contributions are deductible. This includes cash gifts, appreciated securities, and non-cash donations, provided you maintain proper records.
Donating appreciated investments can also help you avoid capital gains taxes, further enhancing the value of your deduction. A donor-advised fund (DAF) can also simplify the process for retirees making multiple charitable gifts.
4. Tax Preparation Fees for Rental or Investment Income
While tax preparation fees are generally no longer deductible for most taxpayers, retirees with rental properties or complex investments may still qualify. Expenses directly related to producing taxable income, such as portfolio management fees or tax preparation for rental properties, can sometimes be deducted. This deduction is particularly beneficial for retirees relying on rental units, REITs, or other passive income sources.
5. Medicare Premiums if You’re Self-Employed
Retirees who continue working as freelancers, consultants, or small-business owners might overlook this valuable deduction. If you have self-employment income, you may be able to deduct Medicare Part B, Part D, and Medicare Advantage premiums. For those balancing part-time work with rising healthcare costs, this deduction can provide significant relief.
6. Long-Term Care Insurance Premiums
Premiums for qualified long-term care insurance are deductible up to annual IRS limits, which vary by age. Retirees often forget this deduction, even though long-term care coverage can become more expensive over time, increasing the value of this write-off. Including these premiums can reduce taxable income while also helping retirees plan for future care needs.
7. Investment Interest Expense Deduction
Retirees who borrow money for investments, such as using a margin loan to buy stocks or an investment property, may qualify for an investment interest expense deduction. This allows you to deduct the interest paid during the year, up to the amount of your net investment income.
While applicable only in specific investing scenarios, this tax break can be worth thousands for those with sizable portfolios. Maintaining detailed brokerage statements is crucial for claiming the full eligible amount.
8. Home Sale Exclusion When Downsizing
For retirees selling their home, the home sale capital gains exclusion is one of the most valuable tax breaks available. Individuals can exclude up to $250,000 in gains from the sale of a primary residence, while married couples can exclude up to $500,000, provided they meet the ownership and use tests. Retirees downsizing their homes should not forget this benefit, as it can dramatically reduce or even eliminate taxable gains.
The Bottom Line
Retirees frequently have access to more tax deductions than they realize. Correctly claiming these deductions can free up funds for healthcare, travel, or everyday expenses. By carefully reviewing your medical costs, charitable gifts, investment expenses, and other eligible write-offs, you can meaningfully reduce your taxable income.
A thorough understanding of these deductions empowers you to build a retirement plan that maximizes your senior benefits and allows you to keep more of the money you’ve earned.
General Money Tips for Everyone
Regardless of your current financial standing, there are always opportunities to improve your finances and boost your wealth. Here’s a quick guide to get you started:
- Increase Your Income: If bills are tight, consider exploring side hustles that can supplement your income, even if you have a full-time job.
- Grow What You Have: Time and compound interest are powerful tools for wealth growth.
Start by assessing your financial position to create an actionable plan. Working with a financial professional can be a smart move to ensure you don’t run out of money in retirement.
- Seize Opportunities: Maximize your senior benefits by taking advantage of all available deals, discounts, and money-saving opportunities. For example, regularly comparing auto insurance rates could save you hundreds.
Conversely, be vigilant about avoiding money-wasting traps that can silently drain your bank account.
Read More About This Story:
- 8 Tax Deductions Retirees Always Forget (Including One Worth $3,000+) (financebuzz.com)