Most seniors live off a fixed income whether the income comes from the social security, pension, or 401k. That’s why it’s important to take advantage of the tax breaks available in order to save money.
- Medical expense deductions
The medical expense deduction allows taxpayers to deduct healthcare expenses that exceed 10% of their AGI, adjusted gross income. If your AGI for the year is $60,000 and you spend $8,000 on medical expenses, you’d be eligible to deduct $2,000 on your taxes.
There is an exception that will expire in 2016. If you or your spouse are 65 years or older or turned 65 during the tax year, you are allowed to deduct unreimbursed medical expenses that exceed 7.5%, rather than the typical 10%, of your AGI. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016. Make use of this benefit and save that extra 2.5% if you are qualified.
You can deduct preventative care, treatment, dental, vision, surgeries, and prescriptions such as medications, glasses, contact lenses, and hearing aids.
Make sure that you keep all of the detailed receipts and records so that you can deduct things such as copays, Medicare premiums, travel expenses on the trips to and from the appointments such as mileage on your car, bus fare and parking fees.
- Roth IRA distributions
With the traditional IRA, the withdrawals you take are subject to ordinary income taxes. However, money withdrawn from Roth IRA is tax-free. Keep in mind that Roth IRAs don’t offer the same up-front tax benefits as traditional IRAs. Traditional IRAs contributions are made with pretax dollars. The assumption here is your income tax bracket might be higher when you are young and working. You fall into a lower income tax bracket after you are retired. Therefore, you save money on taxes when you withdraw the money from the account during retirement. Roth IRAs are funded with after-tax dollars, meaning that your income is already taxed and then the contributions are made. Since you already pay the taxes when you invest in Roth IRA, when you start withdrawing funds, these distributions are tax free.
- Credit for the elderly or disabled
The credit for the elderly or disabled is for low-income seniors and disabled Americans. In order to qualify for the tax credit for the elderly or disabled, you must be 65 or older by the end of the tax year you’re claiming the credit for, or retired on permanent and total disability with taxable disability income. However, your income must not exceed certain limit. The IRS has detailed how this credit can be claimed here.