Fun Things to Do in Retirement With Added Tax Benefits
What should I do first when I retire? Well, it wouldn’t hurt to save a little on your taxes.
After the first few months, maybe retirement had you questioning. What should I do every day? Where do I go to have fun? Who knew I’d have so much free time on my hands? And all the while, it feels like your tax bill is too high.
Fortunately, there are some ways to keep busy and stop boredom in retirement while saving a little on your taxes. Here are five ideas to get you started.
1. Volunteering
Did you know? Volunteerism in the United States is down, but the number of older adult volunteers is rising. According to the Urban Institute, 60% of adults age 55 and older volunteer. And it's no wonder! Volunteer work has been shown to decrease anxiety, depression, and loneliness, as well as increase physical health, happiness, and mental resilience.
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And the advantages of volunteerism can spread to your wallet, too. For instance, most think of a charitable contribution as only a donation of material goods; but you can also consider the amounts paid as part of your volunteer service.
Just to be clear: volunteer hours are not tax deductible on your federal income tax return. However, certain itemized expenses can be. For example, you may be able to deduct meals related to volunteer work. Some charities need representatives to travel overnight — meals included.
What else related to volunteering is potentially tax deductible? Here’s a list of other prospects:
- Uniforms and postage
- Lodging costs associated with volunteer work
- Gas directly related to volunteer work or volunteer mileage at $.14 per mile
To get started with volunteer work, you don’t need to get off your couch. Sites like VolunteerMatch are a place to begin. VolunteerMatch considers your preferences and provides a listing of volunteer postings available.
Note: Be sure your volunteer organization is tax-exempt. Only tax-exempt organizations are qualified for itemized deductions. You can confirm this in one of two ways: research the charitable organization on the IRS website, or ask the organization for a copy of their IRS letter showing their tax status. This is also a good safeguard against fake charities that often target retirees.
2. Manage a rental property
If living on a fixed income in retirement isn’t working for you, there may be a way to supplement your income. Have you thought about managing rental properties?
Rental sites like Vrbo and Airbnb have sprung up, allowing you to post information about your short-term rental. The expenses you incur maintaining the property and getting it ready for rental could qualify for a potential tax deduction:
- Mortgage interest and property tax
- Travel to and from the rental property
- Costs associated with operating the rental unit (like cleaning supplies)
- Repairs or maintenance on the rental property
However, some states may levy an additional tax on “short-term” rentals. This is the case involving proposed legislation in California that would impose a 15% tax on these rentals in the Golden State.
Additional Tax Benefits. You may also be able to deduct depreciation on your rental property. To do this, you will need to meet a list of depreciation criteria, including:
- You must own the property
- You must use it in a business or income-producing activity
- The property must have a determinable useful life
- The property must be expected to last more than one year
Also, there is a way to earn tax-free rental income — legally. Be sure to research whether your specific rental property qualifies. You can also talk to a trusted tax professional.
Next, let's talk about how your secret skills can be used to stay engaged and potentially cut your tax bill.
3. Learn a new skill or hobby
“Retirement” comes from the French word retirer de meaning “to withdraw”. But you don’t need to withdraw from society if that’s not your gig (but if it is, go right ahead — no judgment here).
Many folks in retirement pick up a new interest they haven’t gotten around to before. Research shows that education is strongly associated with health benefits. But deeper studies of a discipline to improve skills may not only enhance your health. These educational endeavors may also allow you to qualify for an IRS education tax break.
The Lifetime Learning Credit. As the name suggests, the federal Lifetime Learning Credit is a tax break for lifelong learners. The student must meet the below list of eligibility criteria:
- Be enrolled or taking courses at an eligible educational institution
- Be taking higher education course(s) to get a degree, a recognized education credential (like a teaching license, for example), or improve job skills
- Be enrolled for at least one academic period beginning in the tax year
Note: If you are planning to claim this credit, it's a good idea to have a specific job skillset in mind. You could check out becoming an adjunct professor or teacher, for instance. Or maybe enroll in classes toward a career in pickleball coaching.
Hobby income. If you decide to undertake a hobby, keep in mind that you cannot deduct hobby expenses on your federal return. And any income you generate from your hobby is reportable on your return. In that way, reporting hobby income can increase your tax liability.
However, if you make under $400 performing your hobby, you won’t be subject to the self-employment tax, (mentioned below). Hobbies can also be a way to “test out” a business idea.
4. Start your own business
According to a recent study, over half of all entrepreneurs are over 50, and 22.8% of entrepreneurs are between the ages of 55-64; so if you've always wanted to, consider starting a business in retirement. You can learn more through the U.S. Small Business Administration (SBA) website, which offers numerous resources for new entrepreneurs.
Or, perhaps you're interested in setting up an online store. Marketplaces like Etsy, Redbubble, and Storenvy can be sources of inspiration.
As mentioned, the IRS offers a tax break for self-employed individuals who make over $400. This means that, as a self-employed individual, you may be able to deduct certain expenses on your business related to:
- Your home office
- Health insurance premiums
- Social Security taxes
…and yes, the above could potentially include freelance work.
5. File your own taxes
Lastly, you may be able to save on your tax bill with another approach: filing your own taxes! If you have time on your hands and are looking for a new challenge, learn more about how your federal income tax return works.
It may not be the most fun thing to do. However, studies show that folks usually spend $240 a year on tax preparation fees. That’s about 69 gallons of gas. Can you say road trip on Route 66?
Note: Of course, taxes can be complicated, so consult a qualified and trusted tax professional if needed.
Retirement tax breaks: A word of caution
No matter which of the aforementioned activities you choose, be sure to document everything well. The IRS requires receipts, proof of purchase, etc. to substantiate many of the tax deductions mentioned.
For example, certain tax breaks, like charitable contributions, can be a red flag for an IRS audit if those contributions are disproportionately high compared to your income. So keep and organize your tax records to properly substantiate your claimed deductions and credits.
Retirement can feel weird when you wake up and have no company emails to sort through or company calls to make. Yet this transition can also rocket you into welcome change. And hey, who knows — maybe the changes you make to stop boredom in retirement will include positive ones for your taxes, too.
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