12 Tax Tips for Seniors (Part 2 of 4)

This is part 2 of a series of blogs on tax tips for the elderly. The first year of retirement can be a huge shock when retirees have to pay a significant tax due to retirement withdrawals and social security.  Other than Roth IRAs, the money you withdraw from your retirement savings is  subject to ordinary income tax.

In part 1 we covered the following topics to minimize the tax burden for elderly.

1) Prepare to be taxed and pay taxes on your investment withdrawals during the year

2) Open a Health Savings Account

3) Choose tax free investments like municipal bonds


In part 2 of this blog we continue with the following tax tips for the elderly.

4) Maximize medical expenses and other deductions by bunching

The retired typically have much higher medical expenses than the young and middle aged.  Medical expenses may consume a good chunk of the retirees’ income.  If you can itemize, and if your medical expenses are greater than 7.5% of your adjusted gross income (AGI), then you can claim a deduction for medical expenses.  Examples of qualifying medical expenses include hospital care, medical insurance premiums, nursing services (which can be performed in your home), long term care services, amounts of long-term care insurance premiums and home improvements for medical care purposes.

The recent tax reform almost doubled the standard deduction.  The standard deduction went up for singles from $6.35K to $12K and went up for married filing joint (MFJ) from $12.7K to $24K.  The deduction goes up another $1.6K if you are over 65 and single.  The deduction goes up another $2.6K if are MFJ and both you and your spouse are over 65 years old.  In order to itemize, the total of your itemized deductions needs to exceed your standard deduction amount or you are better off taking the standard deduction.

Examples of itemized deductions include:

  • Medical expenses you paid
  • State and local taxes
  • Interest you paid (home mortgage, points)
  • Gifts to charity

If you can defer or accelerate medical expenses so that they sum up to be larger in one year, that could maximize your medical deduction.  You could bunch up your other deductions in the same way to maximize their benefit.  For example, if you can’t afford large charitable contributions in a single year, you could defer them for one year and then double them the next year.  Better yet, you could combine your doubled charitable contributions to the same year as your deferred higher medical expenses to get an even larger itemized deduction which would greatly lower your taxes that year.


5) Minimize Social Security taxes

Social security benefits are taxable if the sum of your adjusted gross income, nontaxable interest, and 50% of your social security benefit exceeds thresholds.  These thresholds are:

  • Threshold 1: $25K to 34K (individual) or $32K to $44K (MFJ): Pay income tax on 50% of social security benefit.
  • Threshold 2: >$34K (individual) or > $44K (MFJ) pay income tax on 85% of social security benefit. (good news here is that 15% of your social security benefit is not taxed)

If the sum of your adjusted gross income, nontaxable interest, and 50% of your social security is less than 25K (individuals) or $44K (MFJ), you pay no taxes on your social security benefit.

A strategy to minimize social security taxes is to manage your other retirement income sources (e.g., pensions, dividends & interest from savings/investments, withdrawals from 401Ks/IRAs, part time job income) to stay below the taxable thresholds


One way to manage retirement income to stay below thresholds is to take IRA withdrawals before you sign up for Social Security.  You can take penalty free IRA distributions after age 59.5 but are not required to take them until age 70.5.  If you defer social security until age 70 and take your IRA distributions between 59.5 and 70.5, then the IRA distributions will not put you over the social security tax thresholds.


Another strategy is to save in a Roth IRA and Roth 401K.  Distributions from Roth accounts at least 5 years old are not taxable and do not contribute to the level of taxation of your social security benefit.


Another strategy is to consider the state you retire in.  Most states do not tax social security income. However, the following 13 states currently do tax it: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia


If you are going to owe taxes on social security payments, either have the federal taxes withheld from the monthly payments or make quarterly estimated tax payments to the IRS (as stated in the first tax tip of this blog).


To the following tax tips for the elderly will be covered in future blogs

6) Sell assets that have an investment loss to offset the tax on investment gains and other income

7) Defer selling your home until you meet the use test, until your income is low, or do a 1031

8) Defer sales of assets (e.g., stocks, bonds, real estate, collectibles, businesses) until they are taxed at the lower long-term capital gains rate

9) Gift assets to family members

10) Keep expenses low to minimize withdrawals from taxable accounts

11) If you want to keep working in retirement, run a small business and/or invest in real estate

 12) Good news examples of tax benefits from aging