Managing your taxes in retirement can be quite the undertaking. There are numerous tax deductions to consider — and some you might not even know about. To maximize your tax refund, learn about these commonly missed tax deductions.
Medical expenses include medical insurance premiums as well as the cost of qualified long-term care services and long-term care insurance contracts, according to the IRS.
David M. Hryck, a New York-based lawyer and personal finance expert with Reed Smith, explained the income tax breaks with respect to health insurance and Medicare premiums, long-term care insurance and prescription drugs, as well as the limits depending on your income.
“In order to take advantage of these breaks and benefits, you need to itemize your deductions,” he said. “Medical and dental expenses are deductible from your income taxes on Schedule A of your tax return.”
Hryck said it’s important to note that there is a limit for individuals age 65 and older and their spouses. “Until 2017, the limit is 7.5 percent of a taxpayer’s adjusted gross income (AGI),” he said. So, medical costs that exceed 7.5 percent of an individual’s AGI are tax-deductible. This is also the case for dental expenses.
For example, if your AGI is $ 45,000 and your medical expenses are $ 5,000, multiply $ 45,000 by 0.075 (7.5 percent), and you’ll find that only expenses exceeding $ 3,375 can be deducted. This would give a medical expense deduction of $ 1,625.
To find your medical expense deduction and a more accurate idea of your estimated tax refund, multiply your AGI by 0.075 (7.5 percent). Anything beyond that number is tax deductible as a medical expense. The following table shows scenarios of what your medical expense deduction might be given various AGI and costs of medical expenses.
“Vitamins and supplements can be overlooked as many elderly taxpayers may think there’s no chance of deducting these medical expenses,” said Ryan Himmel, a certified public accountant and CEO of TaxResearchPro. In fact, vitamins and nutritional supplements are typically discounted as possible sources of tax breaks for seniors.
“We’ve seen countless examples of those on dialysis being prescribed specific supplements and vitamins by their doctor that goes beyond just caring for their general health,” Himmel said. He suggested that the cost of these products can amount to thousands of dollars, which can be applied as eligible deductions.
To qualify as medical expenses, the supplements must be recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician, according to the IRS.
It’s important to save receipts for any products that you buy for health reasons, which might add up to a substantial amount over the course of a year. You might also want to ask your doctor to provide a written recommendation for tax-planning purposes.
Elderly people visit the doctor much more frequently than healthy, younger adults. A survey from a Centers for Disease Control and Prevention study showed that more than 20 percent of Americans aged 75 or older visited their doctor 10 or more times in the past year compared with only 10 percent of Americans aged 18 to 44. And when you consider screening and testing appointments, many retirees are spending a lot of time at the doctor’s office. Fortunately, transportation to and from these appointments can be counted as a tax deduction.
Medical transportation mileage is deductible at the rate of 19 cents per mile for 2016. If a taxpayer visited the doctor 10 to 20 times, and the average travel is 20 miles to and from the doctor, that’s another $ 38 to $ 76 that can be included as a deduction on an itemized tax return.
The IRS also states individuals can include the cost of overnight trips that are required for medical services. Fifty dollars per person for each night of lodging can be deducted, according to the IRS.
Many elderly people have caretakers who come to their home. These expenses might be deductible as medical expenses. “The main criteria is that the taxpayer must be chronically ill, and the caregivers must be required or prescribed by a physician,” Himmel said.
“If those two criteria are met, then the taxpayer will need to determine if the costs exceed 7.5 percent of their adjusted gross income. If that’s the case, and they do itemize the expenses on the tax return, then the taxpayer can certainly claim the expenses as a deduction to their income.”
According to the IRS, the expenses that are eligible need not be limited to nursing services as long as they are “of a kind generally performed by a nurse.” Therefore, if a caregiver in the home also provides personal and household services, the amount paid to the caregiver must be separated into personal care services and household services.
The IRS gives an example of possible savings: You pay a visiting nurse or caregiver $ 300 per week for medical and household services. That caregiver spends 10 percent of her time helping you with laundry or shopping. In this case, $ 270 can be applied to taxes and eligible for a tax break as medical expenses.
Although the $ 30 paid for household services cannot be included, some maintenance or personal care services needed for long-term care can be included in medical expenses. You can also include part of the cost you might pay for the caregiver’s meals. Extra household costs that you pay because of the attendant, such as extra rent for the space required for an attendant, are also admissible.
The cost of many medical-related items can be deducted from taxes. Some medical items often overlooked include prescription glasses and contact lenses, bandages, dentures, hearing aids and wheelchairs.
The amount that can be saved will depend on the expenses, of course. The IRS lists the items and explains each in detail. One caveat is that you cannot include medical expenses that were paid by insurance companies or other sources.
If spouses are living separately — which can often be the case if each have different care needs — and they file separately, only the spouse who paid for the item should include it in his tax return.
Max out your IRA before filing your taxes is a great idea. After all, your IRA contributions are tax-deductible.
“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’re age 50 or older]. If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½,” Hryck said.
Amelia Josephson of SmartAsset suggested that seniors consider property taxes in retirement. “Homeownership is an excellent way for seniors to secure their long-term housing costs, but high property taxes or property taxes that increase rapidly from year to year sometimes discourage retirees from owning a home,” she said.
Some states encourage homeownership by seniors and provide exemptions or circuit breakers on property taxes.
“Exemptions usually enable seniors to protect part of their home’s value from property taxes,” said Josephson. “Most exemptions have income limits, so households with high earnings may not qualify.”
Make your year-end tax planning easier. Keep meticulous records of medical-related payments with receipts, other medical information and tax forms. During your tax preparation, talk to a professional tax consultant for tax advice and help meeting the requirements. And, make the most of any write-offs in your retirement years.
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