In the complex landscape of federal taxes, it can be difficult to make sure you’re taking advantage of all the potential savings. If you’re over 65 and retired, there are a number of ways to save on your taxes that you might not be aware of.
1. Bigger standard deductionIn 2017, the standard deduction for people over 65 is $7,900. That’s $1,550 more than younger taxpayers. If you’re not itemizing your deductions yet, make sure to take advantage of them this year.
2. “Bunching” strategies for itemized deductionsIf you don’t have enough deductions to itemize them, you might be able to move some expenses around to itemize some years and take a standard deduction during others. Greg Mangelsdorf, a CPA with Texas-based tax planning firm Atlas Tax Advisors, suggests that retirees who own their homes and have paid off their mortgage may want to try a “bunching” strategy with their property tax bills.
“A lot of times senior citizens have paid off their house,” so they don’t have a mortgage interest expense, typically one of their largest deductions on their taxes, Mangelsdorf said. This might leave them without the volume to itemize deductions.
But if your property tax bill is due in December or January, in a “bunching” year, you would pay one of them late, in January, and the next early, in December, so they’re both in the same year. That way, you can itemize deductions for that year, Mangelsdorf suggests.
3. Medical billsIf you’re itemizing your deductions, you can also deduct medical expenses that amount to more than 7.5 percent of your adjusted gross income. You can potentially use a bunching strategy here, too. On large recurring medical bills, find out if you can either pay them in advance or defer them so you make as many payments as possible during your bunching years.
4. Charitable ContributionsIf you’re itemizing your deductions, of course you should be deducting any charitable contributions, whether that’s a large donation to your favorite charity or just giving your old stuff to Goodwill or the Salvation Army. But you can also use the bunching strategy for charitable contributions, and one way to do that is by using a donor advised fund, Mangelsdorf says.
Donor-advised funds are run by established charities to manage charitable contributions. They hold money for unspecified charitable donations, then distribute it at the account holder’s request. The money deposited in the fund can’t be recovered, but it allows the account holder to deduct all of their charitable contributions at once, even if they’re not quite sure where the money is going yet. Mangelsdorf likens it to a "charitable checking account," where you can dole out funds when you find causes you like.
“That really will turbo-charge your bunching strategy, especially if you don't like the idea of regularly doling out your charitable contributions,” Mangelsdorf says.
5. Donate straight from your IRAIf you’re over 70 and have an individual retirement account, you’ll be required to withdraw a certain amount each year. If you don’t need the money and generally make a lot of charitable contributions, you may want to consider giving it directly to a charity. Otherwise, it will be recorded as ordinary income, and if you’re going to donate that much to charity anyway, you’re paying unnecessary taxes on income you eventually donated.
6. Use a Roth IRAIf your taxable income is below the 15 percent bracket ($37,650 for single people and $75,300 for joint filers) you might want to consider moving money from your traditional IRA to a Roth IRA, where it will continue to vest, but you won’t have to pay taxes on it again.
Mangelsdorf explains that a Roth IRA is a different kind of account where you pay taxes on the deposit but not when you withdraw it. A traditional IRA is taxed like ordinary income when you harvest it.
Many seniors have low incomes, living off of modest pensions and social security payments, so they might have room to take on more income before the exceed the threshold for a higher tax bracket. You can use that extra room to move funds into a Roth IRA, therefore keeping your tax rate low so you don’t have to withdraw it in another year, when you might make more money and pay a higher tax rate.
-- While everyone’s income situation is different, if you’re over 65, these strategies just might save you some money on your next income tax filing.