You’ve finally reached your 66th birthday, and it’s time to say goodbye to the daily grind and set off on a life of retirement ease.
Or so we think.
In truth, retirement for most of us will require careful budgeting and smart financial planning to make our savings last for two or three more decades.
One way to save every penny is to maximize your tax deductions in retirement.
Here are 10 important tax deductions every current and future retiree should know.
When we talk about maximizing deductions, most of us leap immediately to itemizing deductions when we file our taxes.
But if you already paid off your house and have limited out-of-pocket medical expenses, the standard deduction might be your best bet.
Even better, folks over 65 get an extra $1,550 if filing single, or an extra $1,200 if married filing jointly.
As much as we try to push back the clock, our aging bodies require more medical attention in retirement.
Recognizing this, the IRS allows taxpayers over 65 to deduct all out-of-pocket medical expenses that exceed 7.5% of their adjusted gross income, rather than the 10% floor required of younger Americans.
Home Business Deductions
Being retired doesn’t mean that you can’t make money.
Many retired people find rewarding work as consultants or launch a second career through a home-based business.
While you certainly have to pay tax on any earnings, you can also deduct a slew of business expenses, from the home office deduction to gas mileage to the cost of business-related equipment.
Elderly or Disabled Tax Credits
Contrary to what the name implies, you can claim this credit even if you’re not disabled.
If you are over 65 and meet the income requirements, you can qualify for a tax credit of up to $7,500 for married couples filing jointly or $5,000 for single filers for tax year 2014.
The same credit is available for people under 65 who have a permanent and total disability.
Selling a Home
Retirement is a great time to downsize to a smaller place or invest in that RV you’ve always dreamed about.
If you’ve lived in your house for at least two of the past five years, you can sell the home virtually tax-free.
There are limits, but they’re very generous.
Single tax filers can earn up to $250,000 tax-free on the sale of a house, while married couples filing jointly can make $500,000 on the sale of a house without paying taxes on the profit.
If you invested in a Roth IRA, you have the luxury of withdrawing money from the account tax-free after age 59 ½.
Withdrawals from a traditional IRA or 401(k) will be taxed as income, but at least you don’t have to pay an early withdrawal penalty if you’re over 59 ½.
If you have a source of income during retirement, you can continue making contributions to a retirement savings account like a traditional or Roth IRA.
In fact, the 2014 contribution limit is $6,500 if you’re over 50, which is $1,000 more than folks under 50 can invest.
As part of your post-retirement downsizing, you might decide to get rid of one of the cars or clear out all of the kids’ old furniture.
If you donate these items to a charitable organization, you can deduct the fair market value from your taxable income.
There’s a limit on charitable deductions — 50% of adjusted gross income — but don’t forget that any money you spend out-of-pocket while doing volunteer work may also be deductible.
Income from investments is taxed at a lower rate than income earned from a job. That’s great for retirees hoping to live off of their wise investments.
More good news: you can deduct most investment-related expenses, including fees for brokers, financial planners and lawyers.
The deductions must be itemized and are subject to the 2% rule.
Most of us will rely on Social Security checks to help fund our retirement.
It’s important to note that a portion of your Social Security checks may be taxable, depending on your income during retirement.
The most you could possibly be taxed is on 85% of Social Security income, but that’s only for the highest income earners.
Single filers earning less than $25,000 and married couples earning less than $32,000 for 2014 won’t owe any taxes on Social Security earnings.