Top Seven Tax Deductions For Seniors
{{#rendered}} {{/rendered}}Who doesn't love a tax break? Who doesn't love a deduction? Surprising as it may seem, many seniors and their families operate as if they want to pay more than their fair share of taxes.
For instance, Americans leave billions on the table by paying taxes twice, once on a deceased person's estate tax return and once on the inherited income from that estate, even though there is a deduction available in such cases for the estate-tax payment.
Fortunately, there are those who agree with John Maynard Keynes' view that the avoidance of taxes is the only intellectual pursuit that carries any reward. And Barbara Weltman, author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2006," is among them.
{{#rendered}} {{/rendered}}Here's her list of the common and not-so common deductions and breaks available to those up for the pursuit:
1. The standard deduction
If you don't itemize your deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the year. You get an additional $1,250 if you are single and not a surviving spouse and an extra $1,000 if you are married or a surviving spouse.
{{#rendered}} {{/rendered}}For those whose filing status is single, the standard deduction is $6,250 instead of $5,000 and married filing jointly where both spouses are 65 and older get to deduct $12,000 instead of $10,000. Hard to believe, but Weltman says some older taxpayers often forget about the icing on the standard deduction cake.
2. Medical and dental expenses
If you do opt to itemize your deduction, make sure you tally up all your medical and dental expenses. Yes, such expenses must total more than 7.5% of adjusted gross income before you deductions lower your taxes. "But a number of medical expenses are often overlooked," says Weltman.
{{#rendered}} {{/rendered}}For instance, many seniors fail to deduct their Medicare Part B and Medigap insurance premiums. Medicare Part B premiums are $78.20 per month in 2005 and rise to $88.50 per month in 2006. "Many seniors overlook Medicare Part B premiums because they aren't writing a check for that amount," she notes.
Taxpayers also forget that they can deduct a portion of long-term-care insurance premiums as a qualified medical expense. The break is based on age and the older you are the more you can deduct. For instance, seniors 61 to 70, can deduct up to $2,720 of long-term-care insurance premiums. (And if that isn't good enough, the benefit received is generally treated as tax-free income.)
3. Accelerated death benefits
{{#rendered}} {{/rendered}}If you own life insurance with cash value and become terminally or chronically ill, you may be able to tap that cash value tax free to pay medical and other personal expenses, says Weltman. The payment to those terminally ill is fully tax free, but limits apply to those who are chronically ill.
The big benefit of doing this? Taxpayers get a double tax break. The income is tax-free and if you use the money to pay for medical expenses it's deductible if you itemize your deductions. The big downside? There's less insurance money for heirs.
4. Miscellaneous itemized deductions
{{#rendered}} {{/rendered}}Taxpayers can deduct the fees (though not commissions) they pay to financial planners and attorneys for services rendered. With attorneys, you can deduct the portion of the fee specific to all things tax (return preparation, audits and estate-planning tax advice). Of note, be sure to ask for an itemized bill from your attorney when paying for such services so that you know how much you can deduct.
Weltman also says taxpayers sometimes forget they can deduct the cost of subscriptions to investment newsletters and online services as a miscellaneous itemized deduction. As with fees to financial planners and attorneys, the deduction for such expenses is subject to the 2% of adjusted gross income floor.
5. Charitable giving/cash donations
{{#rendered}} {{/rendered}}Donations by cash, check or credit card to charities or government bodies are deductible within set limits if certain conditions are met, says Weltman. Generally, you can write off each year your cash donation up to 50% of your adjusted gross income if you itemize your deductions.
But this year is different. The Katrina Emergency Tax Relief Act of 2005 (KETRA) was designed to encourage more charitable giving. And this law gives a tax break to taxpayers who donate cash to a qualified charity after Aug. 27 and before Jan. 1.
For individuals, KETRA temporarily increases the limits on charitable cash donation deductions and also exempts these contributions from the phase-out on itemized deductions. These contributions will not be subject to the usual limitation of 50% of the taxpayer's adjusted gross income and will not be subject to the deduction cut-back when AGI exceeds $145,950.
{{#rendered}} {{/rendered}}(Those inclined to give money but unsure which charity to use, might consider using a donor-advised fund, which allows you to take the deduction this year and decide in the years to come which charity or charities to donate your funds.)
6. Dependency exemptions for qualifying relatives
A tad complicated and often overlooked, Weltman said some taxpayers can claim a dependency exemption of $3,200 for 2005 if they provide support to a dependent parent, even if the parent lives in a nursing home.
{{#rendered}} {{/rendered}}Taxpayers must meet certain requirements to claim this exemption. For instance, the person deemed a "qualifying relative" must have gross income less than $3,200 and the taxpayer must provide more than one-half of the parent's support for the calendar year.
In some cases, the taxpayer can file as 'head of household,' which has a lower tax rate than single filing status and a higher standard deduction than married filing jointly. To qualify, the IRS says you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother.
"You are keeping up a main home for your father or mother if you pay more than half the cost of keeping your parent in a rest home or home for the elderly," says IRS Publication 501 Exemptions, Standard Deductions and Filing Information.
{{#rendered}} {{/rendered}}7. Estate tax deduction on 'Income in Respect of the Decedent'
If you inherit something on which you must pay income taxes because the person who left you the inheritance never did, then you may be eligible for this special deduction, says Weltman.
For instance, if you inherit a traditional IRA, annuity or other income in respect of a decedent and must report income from this inheritance, you may be eligible for an itemized deduction for the portion of the federal estate tax related to that property, she says.
{{#rendered}} {{/rendered}}For those who have overlooked this deduction, she recommends filing an amended return for all open tax years, generally the prior three year's returns. Read IRS Publication 559, Survivors, Executors, and Administrators for more information.