It’s time to plot tax time: Here are some important issues for seniors
Marcia Campbell | Certified Public Accountant
You might not want to hear this but tax season is right around the corner. It’s already time to start thinking about tax preparation even though April 15th seems far away. If you plan now, you might be able to take advantage of all of the tax breaks that are available in 2017.
Make charitable donations from your IRA.
Before the end of the year, consider making charitable donations from your IRA. If you are over 70 ½, annually you can donate up to $100,000 per individual IRA owner to a qualified charity. This transaction meets your mandatory Required Minimum Distribution (RMD) for the year and does not add to your taxable income as a RMD would.
Take your required retirement distributions.
Make sure you take your RMD for the year. If you haven’t made a charitable donation through your IRA as mentioned above, you must take distributions based on your age and the prior year’s 12/31 balance. Failure to take the RMD can result in a penalty of 50% of the amount not withdrawn.
Accelerate or defer retirement plan distributions.
Consider withdrawing more retirement funds than you need in a year when your deductions exceed your taxable income. You’ll avoid potentially paying more tax in a future year when you have less tax liability now.
If you are under 70 ½, consider deferring your retirement account distributions until you need them. Keeping distributions to a minimum pushes more income to future tax years if you expect you’ll fall into a lower tax bracket at that time.
Retirement savings past age 70½.
If you are still working after age 70½, in some cases, you can avoid minimum distributions from your retirement account. (If you are a 5 percent owner of the company with a 401(k) plan, you are required to take distributions. SEP distributions and SIMPLE are mandatory at 70½. There are no exceptions for business owners or employees who have not retired.)
You may also be able to contribute directly to a Roth IRA but these contributions are subject to income limitations. A Roth IRA contribution will not give you a current year deduction, but the withdrawals will be tax-free in the future. If you own a business, you may be able to make higher contributions to your retirement plans.
Selling your home.
If you are downsizing and selling your home to move into a smaller place or a retirement community, remember that you can exclude up to $250,000 of gains from your income. If you’re married and filing jointly, you can exclude $500,000. This exclusion can be used once every two years.
Seniors who are over 55 have a once-in-a-lifetime opportunity to transfer the property tax assessed value of their primary residence to a replacement home of equal or lesser value. This transfer could take place in the same county, or in a county that accepts transfers.
Be sure to take advantage of the deductions available to reduce your income tax.
Medical expenses deduction.
In 2017, your medical expenses must total over 10% of your adjusted gross income to qualify as a deduction. Medical expenses include:
- Doctors and specialists
- Transportation
- Capital expenses to make changes to your home to provide medical assistance such as adding handrails or grab bars or modifying stairways
- Equipment, supplies and devices
- Procedures such as dental and cataract surgery
- Recovery programs for alcohol or drug addiction
- Medicines
- Medical insurance
- Long term care insurance with certain limits
For seniors, deductions for certain medical expenses, including some long term care and assisted living expenses are among the biggest tax-saving opportunities. Qualified long-term care can include the type of daily personal care services often provided to assisted living residents like help bathing, dressing, and eating, as well as meal preparation and household cleaning. However, these deductions can only be taken if the senior qualifies as chronically ill and has been certified as such by a licensed health care practitioner. The classification “chronically ill” also covers seniors who have severe cognitive impairment like dementia.
Volunteer work donations
If you spend time at your favorite charity working as a volunteer, don’t forget that you can deduct 14 cents per mile to get to and from the charity plus any other expenses you might have like parking fees, purchase of required uniforms and uniform maintenance.
Noncash donations
If you itemize your tax deductions and you are downsizing, you can deduct the fair market value of clothing and household items you donate. Make sure you keep a list and/or photos of the items you donate, along with the receipt provided by the charity.
If you plan to donate your car, make sure you donate to a qualified charitable organization and keep the receipt provided by the charity to substantiate the value of your deduction.
Standard deduction
Even if your deductions are not more than the standard deductions, seniors are still allowed to deduct more. The standard deduction for seniors is $12,700 for married couples filing jointly on income earned in 2017. For single filers and married couples filing separately, the deduction is now $6,350 and for head of household, it is $9,350.
Higher filing threshold
Seniors who have limited income in 2017 have a higher filing threshold. If you are 65 or older, you can earn up to $11,900 before you have to file a tax return. This applies to all filing statuses.
Seniors should consult with their tax preparer before the end of the year to see if any of these strategies work for them for 2017.
By MARCIA CAMPBELL | Contributing columnist with THE PRESS ENTERPRISE
PUBLISHED: November 12, 2017
Marcia L. Campbell, has worked as a CPA for 25 years specializing in seniors, trusts, estates, court accountings and probate litigation support. Reach her at Marcia@MCampbellCPA.com