Navigating Standard and Itemized Deductions for Maximum Refunds
If you get a notice from the Internal Revenue Service, don’t panic. Not all notices from the IRS are meant to be related to tax audits or collection notices anyway. This statutory service sends around 170 million notices to individual taxpayers on an annual basis. These notices are sent to help individuals claim the deductions and credits that they are eligible for, as well as meet their tax obligations. Many Americans are missing out on many of the valuable tax breaks being offered by the IRS, simply because they are unaware of them. Many times, they find the tax code too complicated, or simply don't fret because the rules on these tax exemptions keep on changing. However, individuals, especially retirees, must realize that they save on taxes in several ways. The two most popular ones that they can use are tax breaks and tax deductions. A tax deduction works by lowering an individual's taxable income for the year. On the other hand, a tax break gives a dollar-for-dollar deduction for the tax that is owed.
For our article, our main focus is going to be on tax deductions. These deductions can be claimed through two ways, the popular one of which is standard deductions. This deduction can be claimed automatically. The other way of claiming the deductions is to itemize your deductions instead. In the latter, an individual lists out individual expenses that they want written off in their returns. H&R Block, Inc. (NYSE:HRB) explains the difference between standard and itemized deductions in detail. According to H&R Block, Inc. (NYSE:HRB), an American tax preparation company, understanding these deductions can help individuals in maximizing their potential refunds, or minimize the amount that they owe. When claiming a deduction through either the standard deduction method or itemized deduction, an individual is allowed to claim the deduction that reduces their tax bill the most. However, claiming both isn't allowed.
The standard deduction was nearly doubled in 2018. The 2023 standard deduction for tax returns filed in 2024 is 13,850 for single filers, $27,700 for joint filers, and $20,800 for the head of household. However, many individuals do not know that this standard deduction is even higher for seniors who are aged 65 or older. As of tax year 2023, the extra standard deduction for seniors over 65 who are married and filing jointly is eligible for a standard deduction that is $1,500 more per qualifying spouse. On the other hand, an older individual who is the head of the family or is filing as a single is eligible for a standard deduction that is $1,850 more. For many individuals, it is easier to take this standard deduction because they perceive it to be higher. In other cases, according to Turbo Tax by Intuit Inc. (NASDAQ:INTU), a looming tax deadline may otherwise pressure individuals to take the standard deduction rather than going for itemizing their deductions.
Nevertheless, there are many instances where itemizing tax deductions can make more sense, notes Turbo Tax by Intuit Inc. (NASDAQ:INTU). For instance, your itemized deductions total is more than the standard deduction you would receive. Another case is when an individual has incurred significant out-of-pocket unreimbursed medical and dental expenses within the tax year. There are many more instances discussed below that individual taxpayers can use to save themselves money. According to H&R Block, Inc. (NYSE:HRB), individuals should get help for claiming their deductions. They can choose to file with a tax professional or even file with H&R Block Online to navigate their taxes. Whatever the option that they choose, the end motive is to avail of the biggest refunds possible.
13 Overlooked Tax Deductions for Retirees That Could Save Them Money
A brokerage employee huddled with a group of retirees discussing retirement portfolios.
Methodology
To compile the list of 13overlooked tax deductions for retirees that could save them money, we have consulted various sources such as the IRS, Turbo Tax by Intuit Inc. (NASDAQ:INTU), Kiplinger, Nasdaq, Investopedia, and AARP, to name a few. A consensus approach was adopted to award each tax deduction a point. Every time a source recommended a tax deduction, it was awarded a score. Scores were summed up and deductions have been listed in an ascending order from the lowest to the highest scores.
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Here are the 13overlooked tax deductions for retirees that could save them money:
13. Medical and Dental Expenses
Insider Monkey Score: 3
Seniors often miss out on claiming tax deductions on medical and dental expenses. The medical and dental expenses that are qualified for a deduction, however, are determined by the IRS. These deductions are applicable only for the portion of expenses that exceed 7.5% of your AGI. Some of the medical expenses that can be written off include insurance premiums, nursing services, eye care, long-term care, and psychiatric care.
If you're paying for prescription medications, those costs can be deducted from your taxable income as well. Items like insulin, eyeglasses, contacts, hearing aids, practitioner fees, and certain weight loss and nutrition programs are also included. Attending a medical conference about a disease that you, your spouse, or your dependent may have can also be claimed (excluding meals and lodging). For further details and information on how to calculate your Adjusted Gross Income (AGI), you can visit the IRS website.
12. Charitable Contributions
Insider Monkey Score: 3
One frequently overlooked tax deduction that retirees could save money on is charitable contributions. Incorporating charitable donations into your itemized deductions on your tax return has the potential to decrease your taxable income. When itemizing deductions surpass the standard deduction, the extra amount can lead to a tax reduction of approximately $1 to $12 for every $25 to $50 of value. For tax years 2023 and 2024, individuals can no longer deduct up to $300 in cash donations to qualified charities even if they take the standard deduction.
Those who are itemizing can in turn write off up to 20% to 60% of the AGI for charitable contributions. Individuals must also note that the 100% deduction of your AGI for cash contributions to qualifying charitable organizations was only a special deduction for 2021 and no longer applies. Moreover, seniors aged 70 ½ or older can also donate directly from a traditional individual retirement account known as a qualified charitable distribution (QCD). This is a direct transfer from an IRA to an eligible charity, where an individual can give up to $100,000 a year. Since the donation doesn't show up as income, seniors can get a tax break even if they don't itemize.
11. Spousal IRA Contributions
Insider Monkey Score: 3
Another overlooked tax deduction for retirees that could save them money is through IRA contributions from a spouse. To make contributions to an IRA, an individual needs to have earned income. However, just because you've retired doesn't mean that these contributions will stop. For those who are married and their spouse is still working, the spouse can generally contribute up to $6,500 to a traditional or Roth IRA that you own. The 2024 contribution limit by IRA has jumped to $7,000.
Therefore, an individual whose spouse is contributing to their IRA is eligible for the tax benefit. For tax year 2023, total combined contributions to an IRA cannot exceed $13,000 for 2023 tax year if only one of the couple is 50 or older. Meanwhile, total contributions cannot exceed $15,000 if both of them are at least 50 years old ($16,000 for 2024).
10. Tax Credit for Low-Income Seniors
Insider Monkey Score: 4
While not exactly a tax deduction, seniors can also save themselves some money by availing of a tax credit specifically designed for low-income seniors. To be eligible for this tax credit, an individual must be "qualified" and pass two income tests. You are a qualified individual if you are 65 years or older or you were under age 65, you retired on permanent and total disability, and you received taxable disability income.
9. Business Expenses
Insider Monkey Score: 5
Many seniors engage in a side business and similar entrepreneurial opportunities they can grab their hands on to enhance their retirement savings. These people need to pay income taxes on their self-employed income. However, those who are over 65 can gain deductions such as on the costs associated with running the business. Some of these costs include advertising expenses, supplies, home office expenses, expenses paid to consultants, and even business education expenses.
8. Tax-deductible HSA Contributions
Insider Monkey Score: 6
Many employers offer Health Savings Accounts (HSAs) but retirees often overlook it as a strategy that could save them money. HSAs offer a triple tax advantage. These include pre-tax contributions, tax-free earnings, and withdrawals for qualified healthcare expenses on a tax-free basis. Once individuals reach 55, they can also get an immediate tax deduction for a small catch-up contribution on their health savings account. As of 2024, individuals can contribute up to $4,150 if they have coverage for themselves, plus the additional $1,000 catchup contribution if they reach 55 during the year.
7. Gambling Losses
Insider Monkey Score: 7
If you're into gambling as a senior or even as an individual, it pays to know that gambling losses are also tax deductible. However, these gambling losses are tax deductible only to the extent of your winnings. Moreover, all your winnings must be reported as taxable income on your return. This deduction is available on itemizing deductions on Schedule A and requires having a record of all winnings and losses.
6. Medicare Premiums
Insider Monkey Score: 8
Seniors who become self-employed after retirement can deduct the premiums that they pay for Medicare Part B and Part D, as well as the cost of supplemental Medicare policies or Medicare Advantage plans. Whether a self-employed employee itemizes or not, they can deduct these expenses. However, those covered under an employer-subsidized health plan offered by either their employer or their spouse's employer can’t claim this deduction.
