7 of the most overlooked tax breaks for retirees

March 06, 2021

Allworth Co-CEO Scott Hanson shares a few simple ways retirees can save on their taxes (that are easy to forget about).

You may have heard the phrase, “Money not going out is the same as money coming in.”

Every dime you save means more cash in your pocket.

But of all the frustrating ways to waste money (parking tickets aside), not taking advantage of every single tax break that’s available to you should rank right near the top.

Here are some all-too-often overlooked tax breaks every eligible retiree should capitalize on to save money in 2020 and beyond.

1. Medicare deductions

A lot of retirees are self-employed. They start small businesses, consult, or even invent new widgets. If you’re self-employed, you can deduct your Medicare Part B and D, as well as your costs for Medigap (or Medicare Advantage) plans.

This deduction has nothing to do with the standard deduction and is available whether you itemize or not. (An exception to the above would occur when your health insurance is covered by a retiree medical plan hosted by a former employer, or by your spouse’s employer’s medical plan.)

2. Contributions to an IRA via your spouse

You typically must be earning income to add to an IRA. But if you’re retired and married to a working spouse, they can contribute $7,000 to your IRA.

This of course lowers your taxable income and saves you money while ideally enabling your IRA to accrue even more interest from your investments.

3. Letting the money in your traditional IRA grow until December

Due to COVID-19 and the CARES Act, Required Minimum Distributions (RMDs) weren’t required last year (2020).

This year, however, when it comes to RMDs, things return to normal.

One money strategy that could benefit some people (who don’t need the RMD to live on) would be to wait until the very end of the year (December) to take it, and then request that your sponsor withhold a large part of it to pay all your income tax for the year.

Unlike estimated payments, traditional IRA distributions can be taken whenever you decide, just so long as you take it during the calendar year. In this situation, you can let the money in your IRA continue to grow for an additional 12 months.

4. Gifting money to your heirs

Individuals who pass away can leave $11.58 million to their heirs in 2020 without triggering the estate tax (it’s double that for married folks).

If, however, you’ve accumulated enough wealth that the estate tax will apply when you become deceased, make sure you (and your spouse, if you’re married) “gift” each of your family member-heirs $15,000 every year. (If you’re married, you and your spouse can both gift each family member $15,000, for a total of $30,000).

Family members include children, grandchildren and even their spouses.

5. Charitable donations

You don’t have to itemize to get some of the tax benefits of giving to charity. If you are required to take an RMD, a Qualified Charitable Distribution allows you to donate up to $100,000 each year from your IRA ($200,000 for married couples) to a qualified charity. And the best part is that this transfer is both excluded from being taxed and counts toward your RMD.

This sweet deal also means that, if you itemize, you can claim the tax-free transfer as a deduction.

When it comes to charitable giving, the above is not the only tax break. For the 2020 and 2021 tax years only, you can utilize a $300 above-the-line deduction to a nonprofit of your choosing.

6. The saver’s credit

While a tax deduction reduces your taxable income, a tax credit is a one-for-one reduction of your tax obligation. (In that sense, it’s better than a deduction.)

Because something called a “saver’s credit” can be used by people who have yet to retire, it’s too often forgotten about by retirees. But it applies to some people who are still saving money in a retirement account (and this includes retirees who meet other eligibility requirements).

Basically, if your taxable income is below a certain level in a particular year, if you qualify and are still saving in a retirement account, you could get a tax credit equal to $1,000 for individuals, and $2,000 for couples.

7. Your standard deduction increases when you turn 65

What a difference a day makes. 24 little hours.

Let’s say you’re a single 64-year-old. For 2020, the standard deduction for single people 64 or younger is $12,400. (It jumps up to $12,550 in 2021.)

But a single 65-year-old can claim a standard deduction of $14,050 for 2020 (which goes up $200 in 2021 to $14,250).

Obviously, if you’re 65 or over you’re a whole lot more likely to take the deduction than to itemize. And this of course applies to couples, as well. The standard deduction for 2020 for couples who are both over 65 is $27,400 this year, and $27,800 in 2021.

While the above are some often overlooked tax breaks that can benefit retirees, I can’t tally all the times I’ve explained to clients that a well-conceived, forward-thinking tax strategy could actually save you more money than you’ll make even from a great investment strategy.

Remember, money not going out is the same as money coming in.

I’ve advised people who’ve saved tens of thousands of dollars by working closely with their advisor and accountant to map out a personal tax strategy that looks years ahead into the future.

As always, please let us know if you have any questions related to your taxes, investments, or your retirement plan, or if we may be of service to you in any way.

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