How to Avoid Tax Mistakes and Enjoy Senior Tax Breaks
Disclaimer: We are not tax professionals. Please consult with your accountant or CPA for tax advice.
Tax season is ________.
If you’re like 70% of Americans, you might’ve filled in the blank with “frightful.”
All of us can make mistakes, but when it comes to our money, well… we want to be right on the money. We’ve gathered common tax mistakes as well as easy tax breaks for seniors to make your 2020 tax season as painless as possible.
Common Tax Mistakes
1. The wrong Social Security number
This is a common mistake – you can miss one number without realizing it, but it can cost you. You’ll have to file an amended tax return before you can get any credit or tax breaks.
Even if you have a professional doing it, it’s easy for them to transpose incorrectly, so make sure you double check those numbers before it gets sent off to the IRS.
2. The wrong bank account number
Don’t give away any tax credits to a stranger – make sure your routing and account numbers are correct. Direct deposit is the fastest way to receive tax returns, but make sure you check (and double check!) those numbers.
3. Missing forms
While hiring a tax professional to prepare your taxes can avoid mistakes like this, you can save a good chunk of change by preparing your own taxes.
Be careful about missing forms – double check that you have a proof of health insurance form (1095) as well as brokerage forms for investments (1099s).
If you’re not sure what forms you need, it’s best to talk to an advisor.
4. Ignoring the dotted line
In order for your tax return to be filed, you have to sign it! Forgetting to sign could mean late penalties and fines. You could also be subject to an audit.
5. Forgetting about Required Minimum Distributions (RMDs)
After you’re 70 ½, you’re required to take minimum withdrawals from your IRA or 401(k). If you don’t, the penalty is a 50% tax!
If you completely forgot, be sure to file a Form 5329 to explain your mistake. You might be waived from the hefty tax, particularly if you’re just starting to take distributions.
6. Waiting until April 14
If you’re a procrastinator, we’re talking to you! Tax Day is April 15, and it can be tempting to put things off until the deadline.
The consequences are expensive – most tax preparation services will charge you extra for waiting if they’re even willing to take on your return at all.
If you’re doing the return yourself, rushing can cause you to make silly mistakes like swapping a 6 for a 9 or forgetting about that deduction.
Get it out of the way early, and be done with it!
7. Spelling names wrong
The IRS advises that you compare your name on your tax return to your name on your Social Security card. Be sure they match exactly to avoid any setbacks!
If you want to decrease the number of silly mistakes, consider e-filing rather than sending in a paper application.
Senior Tax Breaks
1. Retirement Contributions
A huge number of seniors over 65 continue to work than retire. And even if you have retired, nothing is stopping you from making tax-deductible contributions to your retirement accounts, such as an IRA or a 401(k). Note that this doesn’t count for Roth IRAs.
The tax break is significant. For example, a married couple over the age of 50 can contribute up to $14,000 to an IRA (as of 2020), and they can deduct that amount from their income tax. That’s huge!
2. Healthcare Expenses
If you have a Medicare Supplement, you likely won’t have enough expenses for this tax deduction to work, but it’s still worth looking into.
If you have any premiums, prescription drug costs, coinsurance, dental bills, or any other medical expenses, you might be able to get a tax break by itemizing your tax deduction.
This means that you don’t take the standard deduction. Instead, you deduct your medical expenses on your income taxes using the Schedule A form.
The caveat to this is that you can only deduct expenses that exceed 10% of your adjusted gross income. That’s your gross income minus any deductions like business deductions.
So, to see if you can even qualify for this deduction, determine what 10% of your adjusted gross income is, and compare that to your out-of-pocket medical expenses for the year.
For example, if your adjusted gross income for 2019 was $120,000, you could only deduct medical expenses that exceed $12,000. So, if your medical expenses for the year were $15,000, you could deduct $3,000.
3. Selling Your Home
With retirement often comes relocating – perhaps to a warmer climate. If you bought your home a while back, you might have a substantial amount of equity built up. For example, maybe you bought your home in 1995 for $100,000. Let’s say it’s now worth $200,000.
You have $100,000 in profits, but you might worry that when you sell your home, you’ll have to pay taxes on that profit.
You’re in luck! Tax laws allow couples to claim up to $500,000 in profits from a home sale and $250,000 in profits for single filers.
That’s a pretty nice tax break!
4. Charitable Contributions
Did you know that individuals over the age of 60 are 6 times more likely to donate to charity than individuals under 30?
Your generosity certainly pays off when tax time comes around. However, there is a bit of fine print.
- You have to itemize your deductions on a Schedule A form (lines 16-19).
- You can only claim donations to “qualified charitable organizations.” Note that churches, temples, mosques, etc. are automatically considered charitable organizations, even if they aren’t on the official list.
- You can’t claim donations to individuals.
- For any donations you plan to claim, you need a receipt with the date, the amount, and the name of the organization.
- You can deduct appreciated capital gains assets up to 20% of your adjusted gross income; non-cash assets up to 30% of your adjusted gross income; cash contributions up to 50% of your adjusted gross income.
4. Just Being 65+
Just for being 65 or older, you get to increase the standard deduction by $1,650 if you’re single and by $2,600 if both you and your spouse are 65+ (for the 2019 tax year).
If you or your spouse isn’t yet 65, but the other is, you can increase your deduction by $1,300.
You can’t beat that!
We hope this tax season will be the easiest one yet. Get it done early, and treat yourself to a night out for being so proactive!
Our team of dedicated, licensed agents can help you as little or as much as you need. Whether it’s answering a few questions about Medicare or creating a comprehensive Medicare Planner with you, we are your Medicare Allies.