Tax Advantages and Overlooked Deductions for Retirees 

Q. April 15 is quickly approaching, and my husband and I are planning on doing our taxes soon. As retirees, I know that there must be some deductions that we may be overlooking. Of course, similar to most seniors on a fixed income, we want to deduct all we can. Are you aware of any tax advantages or overlooked deductions for retirees for 2016 taxes?

A. Tax season is here and, as you mentioned, it’s important to be aware of all the deductions and tax credits available to you so you don’t miss out on valuable savings — and a bigger refund. As retirees, here are some tax deductions that you should be taking advantage of that can save you hundreds, or even thousands, of dollars this year:

Bigger Standard Deduction: When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2016 returns, for example, a single 64-year-old gets a standard deduction of $6,300 (it will be $6,350 for 2017). A 65-year-old gets $7,850 in 2016 (and $7,900 in 2017).

• The extra $1,550 makes it more likely for many seniors to take the standard deduction rather than itemizing and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket.
• Couples, in which one or both spouses are age 65 or older, also get bigger standard deductions than younger taxpayers. When both husband and wife are 65 or order, for example, the standard deduction on 2016 joint returns is $15,100 (and $100 more for 2017).

Easier Medical Deductions: Until 2017 (next year’s returns), taxpayers age 65 and older will get a break when it comes to deducting medical expenses.

• Those who itemize on 2016 returns get a money-saving deduction to the extent their medical bills exceed 7.5% of adjusted gross income (AGI).
• For younger taxpayers, the AGI threshold is 10%.
• If you’re married, only one spouse needs to be 65 to use the 7.5% threshold.
• For 2017 returns (next year), the 10% threshold will apply to all taxpayers.

Deduct Medicare Premiums:  If you become self-employed (e.g., as a consultant) after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (Medigap) policies or the cost of a Medicare Advantage plan.

• This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses for those age 65 and older this year.
• Please note that you can’t claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse’s employer (if he or she has a job that offers family medical coverage).

Spousal IRA Contribution: Retiring doesn’t necessarily mean an end to the chance to contribute to your IRA. Here are some guidelines:

• If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own.
• If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½.
• If you use a Roth IRA, there is no age limit.
• As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter is available to you.
• The $6,500 cap applies both this year and next year.

Charitable Giving

Few Americans have to worry about the federal estate tax. After all, each of us has a credit large enough to permit us to pass up to $5,490,000 to heirs in 2017. Married couples can pass on double that amount. But, if the estate tax might be in your future, be sure to take advantage of the annual gift-tax exclusion.

• This rule lets you give up to $14,000 annually to any number of people without worrying about the gift tax.
• If, for instance, you have three married children and each couple has two children, for example, you can give the kids and grandkids a total of $168,000 ($14,000 X 12) in 2016 and 2017 without even having to file a gift tax return.
• If you’re married, your spouse can give the same amount to the same recipients.
• Money given under the protection of the exclusion can’t be taxed as part of your estate after your death.

Note that Medicaid presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for long-term care Medicaid benefits must disclose all gifts made by the individual or his or her spouse within the prior 5 years. And, even if it’s not the case, Medicaid will likely presume that the gifts made within 5 years of the eligibility request date were made in order to qualify for benefits.

However, if you have a history of giving small weekly or monthly gifts to a charity, some Medicaid offices will not construe those to be disqualifying gifts.  For instance, in Virginia, these types of regular gifts are not penalized so long as they are under $4,000 per year and there was a regular pattern of making this gift for 3 years prior to applying for Medicaid.

Does this potential risk of a Medicaid penalty suggest that all giving should cease? Not necessarily.  However, those who may need nursing home care within the next five to ten years must weigh the joy of giving against the potential cost of losing much-needed Medicaid benefits. For more details about this, please see our resource page, “Medicaid: The Perils of Gifting FAQ.”

Often Overlooked Tax Deductions

Home Renovation Deduction: Typically, home renovation costs are not deductible on your tax return. However, if you make improvements to your home for medical purposes — such as adding entrance-and-exit wheelchair ramps or lowering cabinets for better accessibility — you can deduct those renovations as medical expenses. If the renovations increase the value of your home, however, you can’t claim them as medical-related expenses.

Penalty for Early Withdrawal: If you withdrew your money early from a certificate of deposit, IRA or similar account or investment, the penalty you paid could qualify as a tax deduction, even if you don’t itemize deductions on your 1040.

-Elderly or Disabled Tax Credit: Some low-income elderly or disabled individuals are entitled to a special tax credit. To be eligible, you must meet income limits. For more information, click here.

-Caregiver Deductions: As a caregiver, you likely pay for some care costs out-of-pocket.  Did you know that if you are caring for a relative, you might be able to claim tax deductions and credits for certain medical expenses?  These can include dental treatments, transportation to medical appointments, health insurance premiums, and long-term care costs. The rules apply to caregivers for the 2016 tax year. See IRS Publication 502 for more details.

-Parental Deduction: If you are caring for your mother or father, you may be able to claim your parent as a dependent on your income taxes. This would allow you to get an exemption of $4,050 for him or her and deduct medical and long-term care bills that you pay for your parent out of your pocket.

Tax Preparation Fees: Whether you did your own taxes or paid someone to do them, you can include the fees on your miscellaneous tax deductions list. Costs can include tax return preparation and electronic filing fees. In order to qualify, however, the preparation fees must total more than 2% of your AGI.

Estate planning: A percentage of your estate planning expenses are, in fact, tax-deductible, as per the 2% rule. According to the 2% rule, attorney’s fees are deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross income. When deductible, attorney’s fees are treated as “miscellaneous itemized deductions.”

More details can be found by reading Merians v. Comm’r, 60 TC 187 (1973) (involving estate planning using an irrevocable trust) and Wong v. Comm’r, TC Memo. 1989-683 (1989) (involving estate planning using a revocable trust). The Tax Court ruled that twenty percent (20%) of a non-itemized estate planning bill was deductible as tax advice under Section 212(3). So, we suggest that 20% of the total fees that you paid to our firm can appropriately be considered deductible tax advice.

Real Estate Tax Relief: Fairfax County (and most other counties in Virginia) provides real estate tax relief and car tax relief to citizens who are either 65 or older, or permanently and totally disabled, and meet the income and asset eligibility requirements. Qualified taxpayers may also be eligible for rent relief. Details are as follows:

• If the dwelling is jointly owned by an applicant and spouse, either the applicant or the spouse must be at least 65 years of age or older, or permanently and totally disabled.
• The gross income from all sources of the owners of the dwelling and any relatives of the owners who reside in the dwelling may not exceed $72,000. See the Fairfax County Website for FAQs for more details, including income limitations and percentage of relief. For Spotsylvania County, Virginia, click here. For Montgomery County, Maryland, click here. For Washington, DC, click here.
• In Fairfax County, Virginia, for example, the total combined net assets of owners of the dwelling and of the spouse of any owner who resides in the dwelling may not be greater than $340,000, not including the value of the home, its furnishings and the homesite (up to one acre of land).

One way to get this tax relief if you have a qualifying income but too many assets is to protect those assets with a Living Trust Plus^TM Asset Protection Trust, thereby reducing your net worth. The Living Trust Plus^TM is a special type of asset protection trust that functions very similarly to a Revocable Living Trust and maintains much of the flexibility of a Revocable Living Trust, but protects your assets from the expenses and difficulties of probate PLUS the expenses of long-term care while you’re alive, PLUS lawsuits and a multitude of other financial risks during your lifetime. To learn more about Living Trust Plus^TM, attend one of our upcoming seminars.

Hope You Get a Bigger Tax Refund this Year!

With all of the tax advantages for retirees and overlooked deductions, hopefully you will get a bigger tax refund this year. And once you have your tax refund, if you have not already done incapacity planning, estate planning, or long-term care planning, please call us to make an appointment for a no-cost introductory consultation. Keep in mind that next year you can deduct 20% of your fees for estate planning done this year!

Fairfax Estate Planning: 703-691-1888

Fredericksburg Estate Planning: 540-479-1435

Rockville Estate Planning: 301-519-8041

DC Estate Planning: 202-587-2797