Valuable Tax Breaks for Retirees
Make sure you take all the write-offs you deserve.
You may be looking at your stock portfolio with a great deal of trepidation. So where else can you find some extra cash? You can't control the markets, but you can slash your tax bill by taking all the breaks you deserve.
And this year you have a few additional days to uncover those write-offs. The deadline for most taxpayers will be Monday, April 18, because of the Emancipation Day holiday observed in the District of Columbia on April 15. Taxpayers in Maine and Massachusetts have until April 19 to file their returns. Those later deadlines also apply to last-minute contributions to IRAs and health savings accounts.
One of the first decisions you need to make is whether to itemize or take the standard deduction. If you've been a lifelong itemizer, it could be time to switch if you no longer have mortgage interest to deduct or if you have aged into a bigger standard deduction. Plus, you don't have to itemize to take a number of popular deductions, such as contributions to a health savings account and a traditional IRA as well as certain business expenses related to self-employment.
Those who were 65 by January 1 get a higher standard deduction than younger taxpayers. The basic deduction of $12,600 for joint filers rises by $1,250 for each spouse who is 65 and older. For single filers, the basic amount of $6,300 rises by $1,550.
But some older taxpayers who normally take the standard deduction should consider itemizing, especially if their real estate taxes, state and local income taxes, and charitable donations rose. And if your income took a hit in 2015 because you retired, "you may qualify to deduct medical expenses," says Mark Luscombe, principal federal tax analyst for CCH, a publisher of tax information. If you or a spouse were age 65 or older in 2015, you can deduct medical expenses that exceed 7.5% of adjusted gross income. The lower your income, the more likely big medical expenses will exceed the threshold. (The threshold is 10% for younger taxpayers.) For a list of eligible expenses, read IRS Publication 502, Medical and Dental Expenses.
With the stock market in turmoil in 2015, you may have sold some shares at a loss. Be sure to use those losses to offset any capital gains. You also can use $3,000 of excess capital losses to offset ordinary income.
State-tax choice. In the waning days of 2015, Congress revived and made permanent a popular tax break that allows taxpayers to choose whether they want to deduct state and local sales taxes or state and local income taxes. Using the sales-tax deduction is the way to go for taxpayers who live in states without an income tax, such as Florida. Also consider this deduction if you live in a state that allows special tax breaks for retirees.
Deducting the sales tax could make sense even if your state has an income tax, says Jeffrey Cutter, a certified public accountant in Falmouth, Mass. In his Cape Cod community, he says, it's not uncommon for people to pay sales tax on a $150,000 boat -- a tax tab that could be larger than the 5.1% state income tax. "It all comes down to running the numbers," he says. Other big purchases that could tilt your decision toward a sales-tax deduction are new cars and RVs.
You can use an IRS calculator that shows how much residents of various states can deduct, based on their income and state and local tax rates. You add big-ticket-item taxes to the calculator amount. (Go to www.irs.gov and click "Tools.")
One often-overlooked deduction: If you owed tax when you filed your 2014 state income tax return in the spring of 2015, remember to include that amount in your state-tax deduction on your 2015 federal return.
The IRA-to-charity break. At year-end, lawmakers also made permanent the strategy that allows IRA owners who are 70 1/2 and older to directly transfer tax-free up to $100,000 to charity. The money that you transfer can count toward your required minimum distribution.
But you're out of luck if you took a distribution from your IRA earlier in the year and gave money to charity after Congress took action. You can deduct the donation as a charitable contribution, but the withdrawal counts toward your adjusted gross income. Taxpayers who made the direct transfer earlier in the year hoping that Congress would revive the break don't need to count the transferred amount toward their AGI.
New health care rules. Taxpayers who received health insurance at work in 2015 will receive Form 1095 from their employer that verifies coverage. Because of a start-up glitch, employers have until March 31 to send the form. You can file before you get the notice; just check a box on Form 1040 confirming coverage -- and keep the 1095 with your records.
Those who got their coverage from a health care exchange should have received Form 1095-A by now. This form shows any premium tax credit you received based on the income estimate you provided the exchange when you enrolled.
If you did receive a subsidy, you will use the information on 1095-A to fill out Form 8962. This will compare your income estimate to your actual 2015 income. You will owe more tax, or receive a smaller refund, if you had underestimated your income (because you received a larger subsidy than you should have), and owe less tax, or get a bigger refund, if you overestimated.
Kathy Pickering, executive director of H&R Block's Tax Institute, says many people who received a premium tax credit "were caught by surprise" last tax year when they had to pay back part of the subsidy. Perhaps they were unemployed when they applied for insurance, got a job during the year and never notified the health exchange, which would have reduced the tax credit for the rest of the year, she says. "The big lesson is if you get insurance through the health care exchange and have a life event, you want to update the information with the exchange," she says. Life events include a change in income or household size -- which are used to calculate the tax credit.
If you were not insured for all or part of the year, you will owe a tax penalty. The IRS will dun you the greater of $325 per person or 2% of your household income. (The penalty in 2016 is the greater of $695 or 2.5% of household income.) However, Luscombe says, you may be eligible for a "hardship exemption" that could reduce or eliminate the penalty. (Find a list of exemptions at www.healthcare.gov.)
If you're self-employed. You may have retired from your career job and set up shop as a consultant or contract worker. Be sure to take advantage of a number of deductions for the self-employed. You have until April 18 to set up, and fund, a traditional IRA or a SEP IRA and have the contributions count for 2015.
You can deduct health insurance premiums for yourself, spouse and children under age 27 even if you don't itemize and without regard to the 7.5% or 10% thresholds. The deduction applies to premiums for Medicare and private insurance.
You'll need to pay the full 15.3% of pay that's tapped for Social Security and Medicare. (Employees split the cost with employers.) But the self-employed can deduct 7.65% of the tax. You can take the deduction without having to itemize.
When it comes to the home-office deduction, you have a choice. You can figure out the percentage of space your home office takes up (and prorate utilities and related costs). Or you can use the safe-harbor method that was introduced in 2013. Eligible taxpayers can deduct $5 for every square foot of workspace used, up to a maximum of 300 square feet. So if your home office measures 168 square feet, your home-office tax deduction will be $840. Although it's easier to go this route, says Pickering, "some people would benefit by going through the full calculation."
Pickering also suggests that the self-employed take advantage of another break that Congress made permanent at the end of 2015: Businesses can expense up to $500,000 worth of capital investments. A computer fits into that category, for example, so if you bought a new laptop for your business in 2015, you can deduct the full cost on your 2015 return rather than claiming depreciation deductions over a number of years. You can also deduct new furniture for your home office.
Running a side money-making business in addition to employment? Pickering says she and her husband run a small farm on the side and are thinking of using the break if they buy a little tractor.
Job search. You can deduct job-hunting costs as miscellaneous expenses if you itemize, as long as you were looking for a position in the same line of work as your current or most recent job. Expenses can be written off even if you didn't land a new job.
You can deduct transportation costs, such as parking and tolls as well as 57.5 cents a mile for driving your own car. You also can write off food and lodging expenses if your search takes you away from home.
But such costs can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. Other miscellaneous expenses include tax-preparation fees, investment-management fees and dues to professional societies. Read IRS Publication 529, Miscellaneous Deductions.