4 Tax Breaks for Retirees
4 Tax Breaks for Retirees
Most of your retirement planning will revolve around income. And that makes sense, considering it’s extremely important to establish a stream of income that will last the rest of your life! But there’s another part of retirement planning that some people often overlook: How will your income tax situation change, once you reach retirement?
In most cases, income taxes stay about the same. But some retirees have found that their taxes increase slightly, because they’ve done such a terrific job saving money. Luckily, you can also access some tax breaks that will help to mitigate that potential increase.
Your standard deduction will increase. For those age 65 and older, the IRS currently offers a larger standard deduction, from $6,300 to $7,850 for individuals. If you’re married, your deduction will increase to $15,100. Those are the current deductions offered right now, in 2016, so keep in mind that they could change in the future.
Taking the standard deduction means you can’t itemize, so that’s another thing to consider.
Some retirees can deduct Medicare premiums. If you become self-employed after retirement (for example, you start a home-based consulting business), you might be able to deduct Medicare Part A and Part D premiums, along with premiums that you pay for Medigap or Medicare Advantage plans.
You might be able to deduct IRA contributions. Most couples don’t retire at the exact same time. So, let’s assume that you retire, but your spouse is still working. He or she can continue contributing to a spousal IRA, and you can deduct that contribution on your income tax return (up to the limit, currently $6,500 annually). You can continue to claim this deduction up until age 70 ½, if you’re using a Traditional IRA, or indefinitely if you’re funding a Roth IRA.
Medical expenses can be deducted. Currently, this is true for everyone, but the deduction becomes more important as we grow older and incur greater costs for medical care. Plus, the deduction is greater for retirees right now. Last year, you could deduct expenses in excess of 7.5 percent of your gross income, but that deduction is set to increase to 10 percent this year (and going forward).
Tax deductions are always subject to certain rules, and they can also change as the tax code is rewritten. So, don’t assume that these exact deductions will still be around if you’re set to retire several years from now. The point is, though, that the IRS tends to offer some breaks to retirees. So as you plan for the future, keep in mind that your tax situation might be better than you pictured. And, as always, continue regular consultations with us. We can help you identify savings opportunities and take advantage of them in a timely fashion.