9 most overlooked tax breaks for retirees: Kiplinger

1. Bigger Standard Deduction

A taxpayer who turns 65 gets a bigger standard deduction. When filing 2019 returns, for example, the standard deduction for a single 64-year-old is $12,200, which will increase to $12,400 for 2020. For a single 65-year-old, it is $13,850 in 2019 and $14,050 in 2020. The extra $1,650 makes it likelier that you'll take the standard deduction rather than itemize. If you do and if you're in the 24% bracket, the additional amount will save you almost $400.

Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. If only one spouse is 65 or older, the extra amount is $1,300; if both are 65 or older, it is $2,600.
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2. Deduct Medicare Premiums

If you become self-employed 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.

One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan. (Photo: Shutterstock)

3. Spousal IRA Contribution

Generally, you must have earned income to contribute to an IRA, but if you're married and your spouse is still working, he or she can contribute up to $7,000 a year to an IRA that you own (assuming you're at least 50 years old).

For this year only, you also have more time to make contributions to an IRA for 2019. Normally, the due date for 2019 IRA contributions would have been April 1, but due to COVID-19, the deadline has been extended until July 15.
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4. Timing Tax Payments

Not a tax break per se, but it's important for retirees used to having taxes withheld throughout the year to make sure they're paying the IRS on time in order to avoid penalties.

You have two options: withholding or quarterly estimated tax payments.

Withholding applies to more than paychecks. If you receive regular payments from a 401(k) plan or company pension, the payers will withhold tax unless you instruct them not to. Likewise for withdrawals from a traditional IRA.

Withholding from Social Security benefits works differently. There will be no withholding unless you specifically ask for it by filing a Form W-4V.

As an alternative to withholding, you can make quarterly estimated tax payments. Indeed, you must do so if you'll owe more than $1,000 in tax for the year above and beyond what's covered by withholding, or face a penalty for underpayment of taxes.
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5. Avoid the Pension-Payout Trap

If you get a lump-sum payment or other rollover distribution from a company plan, you could fall into a pension-payout trap.

If you take such a distribution, the company is required by law to withhold a flat 20% for the IRS, even if you simply plan to roll over the money into an IRA. Moreover, even if you complete the rollover within 60 days, the IRS will still hold onto the 20% until you file a tax return for the year and demand a refund.

Not to panic: There's a way around such an outcome. Simply ask your employer to send the money directly to a rollover IRA. As long as the check is made out to your IRA and not to you personally, there's no withholding.
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6. The RMD Workaround

Required minimum distributions are not required in 2020, again because of the pandemic. However, retirees taking RMDs from their traditional IRAs in other years may have an extra option for meeting the pay-as-you-go demand.

If you don't need the required distribution to live on during the year, wait until December to take the money. And ask your IRA sponsor to hold back a big chunk of it for the IRS, enough to cover your estimated tax on both the RMD and your other taxable income as well.

Although estimated tax payments are considered made when you send the checks, amounts withheld from IRA distributions are considered paid throughout the year, even if they are made in a lump sum at year-end. So, if your RMD is more than big enough to cover your tax bill, you can keep your cash safely ensconced in its tax shelter most of the year and still avoid the underpayment penalty.
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7. Give Money to Your Family

Few Americans have to worry about the federal estate tax as most have a credit large enough to permit them to pass up to $11.58 million to heirs in 2020. 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, which lets you give up to $15,000 annually to any number of people without worrying about the gift tax. Your spouse can also give $15,000 to the same person, making the tax-free gift $30,000.
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8. Give Money to Charity

Once you reach age 70½, you can make tax-friendly charitable donations even if you don't itemize by using a qualified charitable distribution. With a QCD, you can transfer up to $100,000 each year from your traditional IRAs directly to charity. If you're married, your spouse can transfer an additional $100,000. The transfer is excluded from taxable income, and it counts toward your RMD.

For 2020 only, there's a new "above-the-line" deduction of up to $300 for cash donations to charity. But if you itemize, you can't take this new deduction. In addition, contributions to donor-advised funds and certain organizations that support charities are not deductible.
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9. Tax-Free Profit From a Vacation Home

To qualify for tax-free profit from the sale of a home, the home must be a principal residence and you must have owned and lived in it for at least two of the five years leading up to the sale. But you can capture tax-free profit from the sale of a former vacation home.

Say you sell the family homestead and cash in on the break that makes up to $250,000 in profit tax-free ($500,000 if you're married and file jointly). You then move into a vacation home you've owned for 25 years. As long as you make that house your principal residence for at least two years, part of the profit on the sale will be tax free.
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