You probably don’t look forward to tax season. Tax time means gathering documents, doing some math, and trying to understand current tax regulations. And many taxpayers, especially seniors, are overwhelmed when it comes to preparing their taxes.
Maybe you’re not sure what laws have changed this year or how you can maximize your tax savings. One great place to start is with understanding the many tax breaks available to taxpayers. As a senior, you’re in your prime for taking advantage of the many tax credit and savings programs available.
Tax credits are subtracted from the total amount of income tax you owe. That means if you owe $1,000 in taxes and qualify for $500 in tax credits, you’ll only owe $500 in taxes when you file.
Below are three tax credits that many seniors qualify for but don’t think to include when filing their taxes.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) provides a credit if you paid eligible tuition or education expenses for yourself, your spouse, or one of your dependents. There is no limit on how many years you can claim the credit, which makes it ideal for seniors who’ve returned to school after many years away. In order to qualify, the expenses must be for classes that are part of a degree program or that enhance an individual’s job or professional skills.1
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is much like the LLC, but it can only be used if you paid for qualified educational expenses for an eligible student’s first four years of higher education. This credit can often be claimed by seniors who pay the education expenses of a child or grandchild whom they claim as a dependent for tax purposes.2
Tax Credit for the Elderly and Disabled
This tax credit is specially designed to give a break to seniors and individuals who are totally and permanently disabled. Taxpayers must meet some basic conditions in order to be eligible to receive this credit.
Tax deductions are money that you can subtract from your income before you determine how much tax you’ll owe. Deductions can add up quickly, which means substantial savings on your taxes.
Some of the most common tax deductions are described below.
Itemized Medical and Dental Expenses
Out-of-pocket medical and dental expenses that exceed 7.5 percent of your adjusted gross income can be deducted on your taxes. This deduction is particularly valuable for seniors, who often have higher out-of-pocket medical costs than younger taxpayers.
Be sure that you understand what qualifies as a deductible expense before you file your taxes.
The Mortgage Interest Deduction
If you paid a home mortgage during the tax year, you may be able to deduct some or all the interest you paid on that mortgage. In order to qualify, the mortgage must be a secured debt on a qualifying home that you owe. Your mortgage company will send you a Form 1098 if you paid interest on a mortgage during the tax year.3
Home Selling Costs
When you sell a private home, you are required to pay something called capital gains tax. You can reduce this tax by including the costs of selling your home when you calculate your total profit, also known as your gain. However, this credit can be tricky to calculate. You should work with a qualified tax professional to determine what you can claim.
If you paid refinancing points on your mortgage in 2018, you may be able to deduct those points under the home mortgage interest deduction. You’ll need to meet several criteria to qualify, but this deduction can be very valuable if you are eligible to claim it. This is another deduction that you should work with a tax professional to calculate.
Out-of-Pocket Charitable Deductions
If you made charitable contributions to a qualifying non-profit group, you may be eligible to deduct some or all those donations. You can review the IRS’ publication4 to determine what donations you’re able to deduct and how you should record them on your income taxes. Try donating only to organizations that send you a record of your yearly giving around tax time.
Deductible Medicare Premiums for the Self-Employed
If you’re self-employed and you, your spouse, or your dependent pay Medicare premiums, you may be eligible to deduct some or all the premiums from your taxes. For 2018, you can deduct Medicare expenses less than or equal to the self-employed individual’s earned income.
Long-Term Care Deduction
If you have a long-term care insurance policy, you may be able to deduct some of the premiums. These are considered unreimbursed medical expenses. There are different limits and variables that impact the total deduction you can claim, so be sure to review them before you file your taxes.
Tax advantages are special economic bonuses that are given for certain types of investment accounts. These advantages are designed by the government to strengthen the economy. They’re particularly beneficial for seniors because they often have valuable investment accounts.
Waiver of Penalty
In some situations, you may accidentally underpay your taxes because your investment income exceeded what you expected for the year. The IRS has shown an increased willingness to forgive underpayment penalties so long as you paid at least 90 percent of your tax liability during the tax year.5
In some limited situations, dividends that you were paid but were immediately reinvested in stocks may not be counted as taxable income. In general, this is only true if you weren’t given the option of receiving a check for your dividends instead of reinvesting them. Be sure to consult a tax adviser if you think you might qualify for this exemption.
Potentially Tax-Exempt Social Security
While Social Security benefits are often taxable, you will not be liable to pay taxes on the entire amount of Social Security that you receive. For the 2018 tax year, taxpayers in lower economic tiers pay taxes on up to 50 percent of their Social Security earnings. Taxpayers in higher brackets never pay taxes on more than 85 percent of their Social Security earnings.6
Knowing which tax credits and deductions you qualify for is one of the best ways to ensure that you’re getting the tax breaks that you deserve. Of course, doing the paperwork to claim the appropriate credits and deductions can be a challenge. Working with a tax professional is a great way to reduce your tax liability or increase your refund.