Tax season 2015 officially ended last week with the passing of the October 15th extension deadline. Which means it’s now time to start planning for tax season 2016! With that in mind, I’m passing along the following article originally posted by the Motley Fool addressing some simple tax tips retirees can keep in mind to help them plan for an save on their possible tax burden.
Nobody wants to pay taxes, least of all retirees who often don’t have a lot of money to begin with. As a retiree on a fixed income, it’s natural to want to hang onto every penny you get your hands on, and the idea of forking over even a small amount of your income to taxes might seem like a major blow. But if you prepare for what’s ahead and make a few strategic decisions, you could lower your taxes and keep more of that money for yourself.
Here are a few tips to help a retiree minimize her tax burden.
Prepare to be taxed on your savings withdrawals
Unless you have a Roth IRA, the money you withdraw from your retirement savings is subject to ordinary income tax. So if your effective tax rate is 15% and you withdraw $30,000 a year from your 401(k), prepare to fork over about $4,500 to the IRS. The same holds true for pension plan withdrawals, which are also taxed as ordinary income. Furthermore, if you have an annuity, a portion of your distributions may be taxable as well. Knowing what to expect tax-wise can help you prepare and better manage your money, so read up on the rules for taxes and withdrawals.
Maximize medical deductions
Medical expenses tend to eat up a huge chunk of retirees’ income. The good news is that many of these expenses are also tax-deductible. Some examples include Medicare premiums, in-office copays, and prescription drugs.
As long as you itemize, you can claim a deduction for medical expenses — but only if they reach a certain threshold. In fact, for a long time, you could claim a medical expense deduction if your total out-of-pocket costs reached 7.5% of your adjusted gross income (AGI), but that limit has since been increased to 10%. Fortunately, those 65 and older are exempt from the 10% threshold increase until 2017. So if you’re currently 65 or older, you can still take advantage of that lower threshold for the 2016 tax year.
Take advantage of mortgage interest
In an ideal world, you’d have paid off your mortgage before entering retirement. But that doesn’t always happen, so if you’re still making a monthly mortgage payment, you might as well use it to your advantage tax-wise by deducting your mortgage interest. Even if you’re toward the end of your mortgage, at which point the majority of your money should be going toward your principal, be sure to take whatever interest deduction you’re eligible for.
As a retiree, you may not have a lot of spare cash to give away to charity. If you can’t afford to donate much money, try donating goods instead. As long as you get an itemized receipt for the items you donate, you can claim a deduction on your taxes. Many retirees wind up downsizing at some point because they no longer need as much spare room or can’t afford to maintain larger homes. If you’re in the process of downsizing, donating the things you no longer need can save you money on taxes and make for a less burdensome move.