When you retired, you may have thought that you were done dealing with the IRS; however, you will likely find that you still have to file tax returns. You may even find that you still have to pay the IRS annually when you file your return. Luckily, there are legitimate ways you can minimize your tax liability after you retire.
Medical and Dental Expenses
The money you pay for premiums, even Medicaid premiums, may be deductable. Long-term medical care premiums, prescriptions, nursing home care, and out-of-pocket medication costs may also be deductible. When you are trying to decide if this is a way that you can save money, you have to look at your adjusted gross income. You can only claim medical and dental deductions that are in excess of 7.5 percent of your AGI. So, if your AGI is $10,000, you can only claim the amount over $750. That means that if your medical expenses were $2,500, you can deduct $1,750.
Invest
When you are making money from investments, such as interest or capital gains, you don’t pay Medicare or Social Security taxes on them. While you have to pay from 5 to 15 percent in taxes on this income, you will still come out better than you would if you got a job that paid the same amount as your investments.
Retirement Plan Contributions
Even though you are retired, you can still keep contributing to your retirement plan using money from investments. Once you turn 50, the amount you can put into an IRA or 401k is increased. While you may have to pay taxes on some of the money you invest now, you will be able to take it out tax-free later. Be sure to claim the allowable deductions for investment expenses to maximize your deductions.
Home Sales
If you decide to move into a smaller home, or even just a different home, you can sell your home tax-free if you have lived in it two out of the five years before you sell it. If you are single, you can make a $250,000 profit without worrying about taxes. The amount doubles for a married couple filing a joint return.
Standard Deduction
If you don’t have enough deductions to itemize, don’t fret. You can still claim a higher-than- normal deduction if you are 65 years old or older by December 31 of the tax year. This allows you to minimize the amount you have to pay the IRS, and in some cases, it may even net you a refund.
