10 Ways Older Taxpayers Can Save

Hat tip to RetirementThink:

Kay Bell, author of the blog, Don't Mess With Taxes, has provided some tips for Older Americans. Kay has a lot of IRS insight and just wrote a new book, "The Truth About Paying Fewer Taxes."

10 ways older taxpayers can save

1. Deduct a larger standard amount

Most taxpayers choose the standard deduction rather than go to the trouble of itemizing. If you're age 65 or older, the standard deduction is even more appealing because older filers get to claim a larger amount. All you have to do is check a box, line 39a of Form 1040 or line 23a of Form 1040A. Do the same for your spouse if he or she is old enough. Then complete the worksheet in your form's instruction book (or your tax software will do it for you) to come up with the larger standard deduction amount you can claim.

Technically, you don't have to be 65 to get this bigger deduction. If your 65th birthday is Jan. 1, the IRS considers you to be age 65 for the previous tax year and you may claim the larger standard deduction.

2. Add your property taxes

Real estate taxes are a great tax break, but it's usually been limited to filers who itemize. Many older taxpayers don't itemize because their standard deduction amounts are greater than their Schedule A expenses, especially if they've paid off their home mortgage and no longer have those interest payments to deduct.

Now, however, taxpayers who claim the standard deduction can add up to $500 in property tax payments ($1,000 if married filing a joint return) to their standard deduction amount. This real estate tax add-on also is available for the 2009 tax year.

3. Claim your credits

Tax credits are a great benefit. They directly reduce the amount of tax you owe and some, known as refundable credits, could net you money from the IRS even if you paid little or no tax.

The Credit for the Elderly or Disabled, as its name suggests, is available to individuals who are either age 65 or older or who are younger and retired on permanent and total disability. Generally, you must be a United States citizen or resident to take the credit. You also must have adjusted gross income and nontaxable Social Security or other pension benefits that don't exceed certain thresholds. Details and worksheets are found in IRS PUBLICATION 524.

In some cases, older taxpayers may be eligible for the Earned Income Tax Credit (EITC). This credit is designed for workers who don't make much money and it is one of the refundable credits. The credit may be larger if you care for a qualifying child, including a grandchild. If you do not have a qualifying child, you must be under age 65 to qualify for the EITC. Details on the EITC are in IRS PUBLICATION 596.

4. Keep an eye on extra income

Generally, if Social Security is your only income, your benefits are not taxable and you probably do not need to file a federal income tax return. However, if you supplement your government retirement benefits, you could end up owing Uncle Sam. Just how much, if any, of your Social Security benefits are taxable depends on your total income and your marital status.

For 2008 filing purposes, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status: $32,000 for married couples filing jointly and $25,000 for single, head of household, qualifying widow or widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year. Details on taxation of Social Security can be found in IRS PUBLICATION 915.

5. Determine your retirement account distributions

If you have certain retirement accounts, you must begin taking money from the accounts annually, starting in the year you turn 70½ or, in some cases, the year you retire if is later. These withdrawals are known as Required Minimum Distributions, or RMDs. The RMD rules apply to retirement accounts which are tax-deferred. This includes all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD rules also apply Roth 401(k) accounts, as well as to traditional individual retirement accounts and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

RMD amounts generally are calculated by dividing each account's prior Dec. 31 balance by a life expectancy factor, found in tables in IRS PUBLICATION 590. However, the recent stock market downturn, a provision of the Worker, Retiree, and Employer Recovery Act of 2008, signed into law on Dec. 23, 2008, waives the 2009 RMD.

Some older taxpayers, however, still will face RMDs this year. An account holder's first RMD can be delayed until April 1 of the year following the year in which he or she turns 70½. For affected retirement plan owners who reached the septuagenarian trigger last year and postponed their first RMD, they must take that 2008 distribution by the first day of this coming April. But at least with the 2009 RMD waived, you only have to take out the 2008 amount this year.

6. Roll your retirement money to charity

If you are 70½ or older, you can have money from your IRA transferred directly to a charitable organization. As much as $100,000 can be donated this way and the option is available for both the 2008 and 2009 tax years. This is a particularly welcome option for traditional IRA account holders who must take required minimum distributions but who do not need the money to cover living expenses. By having the RMD go straight to their charity of choice, the IRA distribution is not counted as taxable income to the IRA owner.

Because of the waiver of the 2009 RMD, some taxpayers might think they cannot use this donation method. Not so. Any amount up to the $100,000 limit can be transferred directly to a charity, not just RMDs. The one downside of this type of direct giving is that the IRA-to-charity gift amount is not deductible by the donor.

The IRA donation rollover also could be utilized by account holders who face donation limits based on their income. You usually cannot donate an amount that exceeds 50 percent of your adjusted gross income. However, when the money goes directly to the charity from the IRA, it doesn't count against that limit because it's not included in your gross income.

7. Share your wealth sooner

You've worked hard and saved long to accumulate a sizeable estate. You definitely want it go to your heirs, not Uncle Sam. In most cases, that's not a problem. Only around two percent of estates are large enough to be subject to the federal estate tax. For 2008 the tax applied only to estates greater than $2 million; the exemption amount s in 2009 is $3.5 million.

Some individuals, however, opt to make sure that their friends and family members get what their shares early. You can give several thousand dollars a year to as many people you wish without any tax consequence. For 2008m you could give up to $12,000 to any many individuals. In 2009, the gift exclusion amount is bumped up to $13,000. Your spouse also can give away the same amounts. These gifts allow you to see how much your generosity is appreciated while simultaneously reducing the value of an estate that might be near or just more than the estate tax threshold. You can learn more about gift taxes that IRS' SPECIAL FAQ PAGE.

8. Hang onto your home longer

After the loss of a spouse, the surviving husband or wife has to make a difficult and potentially costly decision as to whether to sell the family home. A married couple usually can exclude up to $500,000 in profit when they sell their residence. Such a generous benefit wasn't available to widow or widower unless the surviving spouse sold the home in the year the spouse died.

Now, however, a tax law that took effect in 2008 allows a surviving spouse to claim the $500,000 exclusion as long as the widow or widower sells the home within two years after the spouse's death. The widow or widower must remain unmarried and all other tests, such as residency and ownership, also must be met.

9. Deduct long-term care premiums

More people are planning for their later-life care by buying long-term care insurance. The policies also can pay off on your tax returns before you need the covered services. If you itemized deductions, you can deduct at least some of the premiums you pay on your Schedule A as a medical expense.

Your policy premiums depend in large part on your age. Your age also is the determinant in how much you can deduct. For 2008 returns, the deduction amounts are:

 

• Age 40 or under = $310
• Age 41 to 50 = $580
• Age 51 to 60 = $1,150
• Age 61 to 70 = $3,080
• Age 71 or over = $3,850

 

In many cases the actual amount you pay for long-term care insurance will be greater than the above limits. Any amount in excess of these limits is not deductible. And if you pay less than the amount for your age range, then only your actual premium payments are deducible.

Although in the grand scheme of things, the amounts may be small, they may be just what you need to get you over the income threshold -- 7.5 percent of your adjusted gross income -- that you must meet to itemize medical costs.

10. Take advantage of zero capital gains

Capital gains tax rates on profits earned by selling assets held for more than a year already are lower than the taxes on ordinary, typically wage, income. On Jan. 1, 2008, those capital gains rates got even better for investors in the 10 percent and 15 percent tax brackets. Rather than owing 5 percent tax on capital gains and qualified dividends, these sellers owe no tax. The zero capital gains rate continues through 2010.

While no taxes generally are good taxes, the zero percent rate does have some potential drawbacks. Older investors who choose to cash in some tax-free holdings could find that such added income could produce taxes on their Social Security benefits.

And remember, although you definitely need to consider taxes in making investment decisions, your portfolio moves should not be driven by taxes, but rather guided primarily by how they fit into your overall financial strategy.