Top 5 Tax Deductions for Retirees to Consider

Retirement brings many changes, including shifts in your financial landscape. One area that often catches retirees off guard is taxes. While your income may decrease, you might be surprised to find that your tax burden doesn’t always follow suit. However, there’s good news: numerous tax deductions are available specifically for retirees. Understanding and leveraging these deductions can significantly reduce your tax liability, helping you preserve more of your hard-earned retirement savings.

In this comprehensive guide, we’ll explore the top tax deductions every retiree should be aware of, and how to make the most of them. We’ll also discuss how Corvee’s tax planning software can help tax professionals optimize these deductions for their retired clients.

1. Medical and Dental Expenses Deduction

As we age, healthcare costs often increase, making this deduction particularly valuable for retirees. The IRS allows you to deduct qualified medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI).

Qualified expenses include:

• Payments for doctors, dentists, surgeons, and other medical professionals
• Hospital and nursing home care
• Prescription medications and insulin
• Medical devices like glasses, contacts, hearing aids, and prosthetics
• Transportation costs for medical care

This simple calculator demonstrates how the medical expense deduction works. In this example, a retiree with an AGI of $50,000 and $6,000 in medical expenses would be able to deduct $2,250.

To maximize this deduction, consider bunching medical expenses into a single tax year when possible. This strategy can help you exceed the 7.5% threshold and qualify for a larger deduction.

2. Standard Deduction for Seniors

The IRS offers a higher standard deduction for taxpayers aged 65 and older. For the 2023 tax year:

• Single filers 65 or older: $14,700 (compared to $13,850 for those under 65)
• Married filing jointly, both 65 or older: $30,700 (compared to $27,700 for couples under 65)

This increased standard deduction can be a significant benefit, especially for retirees who don’t have enough itemized deductions to exceed the standard amount.

3. Retirement Account Contributions

Just because you’re retired doesn’t mean you can’t continue contributing to retirement accounts, especially if you have some form of earned income. Contributions to traditional IRAs can be tax-deductible, reducing your taxable income for the year.

For 2023:

• If you’re 50 or older, you can contribute up to $7,500 to an IRA
• If you’re still working and have a 401(k), you can contribute up to $30,000 if you’re 50 or older

Remember, you must have earned income to contribute to these accounts. However, if you’re doing any part-time or consulting work in retirement, this can be a valuable way to reduce your tax bill.

4. Charitable Contributions

Many retirees find they have more time to devote to charitable causes. Fortunately, donations to qualified charitable organizations can be tax-deductible if you itemize your deductions.

A particularly tax-efficient strategy for retirees is the Qualified Charitable Distribution (QCD). If you’re 70½ or older, you can donate up to $100,000 directly from your IRA to a qualified charity. This donation counts towards your Required Minimum Distribution (RMD) but isn’t included in your taxable income.

5. Property Tax Deduction

If you own your home, you can deduct property taxes on your federal income tax return. This deduction is particularly valuable for retirees living in areas with high property taxes. However, keep in mind that the total deduction for state and local taxes (including property taxes) is capped at $10,000 per year ($5,000 if married filing separately).

For retirees considering downsizing or relocating, it’s worth factoring in the property tax implications of different areas. Corvee’s state and local tax planning tools can help tax professionals analyze the impact of property taxes across different locations.

Bonus: Social Security Tax Reduction Strategies

While not a deduction per se, it’s worth mentioning strategies to reduce taxes on Social Security benefits. Up to 85% of your Social Security benefits may be taxable, depending on your overall income. By carefully managing your income sources, you may be able to reduce the taxable portion of your benefits.

Strategies include:

• Timing withdrawals from retirement accounts
• Managing capital gains and losses
• Using Roth conversions strategically

These strategies require careful planning and consideration of your overall financial picture. Corvee’s multi-entity tax planning capabilities can help tax professionals model different scenarios to minimize the taxation of Social Security benefits.

Maximizing Deductions with Corvee

For tax professionals working with retired clients, leveraging these deductions effectively requires a comprehensive understanding of the client’s financial situation and careful planning. This is where Corvee’s tax planning software can be invaluable.

Corvee’s platform offers:

1. Comprehensive Analysis: The software can analyze a client’s entire financial picture, including various income sources, deductions, and credits, to identify opportunities for tax savings.
2. Multi-Year Projections: By modeling different scenarios over multiple years, tax professionals can develop strategies that maximize deductions and minimize tax liability over the long term.
3. State-Specific Calculations: With state and local tax planning features, Corvee ensures that state-specific deductions and credits are factored into the overall tax strategy.
4. Strategy Comparisons: The software allows for side-by-side comparisons of different tax strategies, helping identify the most beneficial approach for each client.
5. Client-Ready Reports: Corvee generates clear, professional tax plans that can be easily shared with clients, helping them understand and appreciate the value of proactive tax planning.

Navigating Retirement Tax Planning with Confidence

Retirement tax planning can be complex, but understanding and leveraging available deductions can lead to significant savings. By staying informed about these deductions and working with a knowledgeable tax professional equipped with powerful tools like Corvee, retirees can optimize their tax situation and preserve more of their hard-earned savings.

Remember, tax laws and deductions can change from year to year, so it’s crucial to stay updated and regularly review your tax strategy. With careful planning and the right tools, you can navigate retirement tax planning with confidence, ensuring a more financially secure and enjoyable retirement.

Are you a tax professional looking to enhance your services for retired clients? Get a free demo. Explore Corvee’s tax planning software today and discover how you can provide more value through comprehensive, data-driven tax planning strategies.