Seniors are missing out on Tax Deductions

December 27, 2023

Many seniors are missing out on tax deductions and tax savings, according to a recent article from The Wall Street Journal, “Four Lucrative Tax Deductions That Seniors Often Overlook.” The tax code is complicated, and changes are frequent.

Since 2017, there have been several major tax changes, including the Tax Cuts and Jobs Act, the pandemic-era Cares Act and the climate and healthcare package known as the Inflation Reduction Act. Those are just three—there’s been more. Unless you’re a tax expert, chances are you won’t know about the possibilities. However, these four could be very helpful for seniors, especially those living on fixed incomes.

The IRS does offer a community-based program, Tax Counseling for the Elderly. This community-based program includes free tax return preparation for seniors aged 60 and over in low to moderate-income brackets. However, not everyone knows about this program or feels comfortable with an IRS-run tax program.

Here are four overlooked tax deductions for seniors:

Extra standard deduction. Millions of Americans take the standard deduction—a flat dollar amount determined by the IRS, which reduces taxable income—instead of itemizing deductions like mortgage interest and charitable deductions on the 1040 tax form.

In the 2023 tax year, seniors who are 65 or over or blind and meet certain qualifications are eligible for an extra standard deduction in addition to the regular deduction.

The extra standard deduction for seniors for 2023 is $1,850 for single filers or those who file as head of household and $3,000 for married couples, if each spouse is 65 or over filing jointly. This boosts the total standard deduction for single filers and married filing jointly to $15,700 and $30,700, respectively.

IRA contributions by a spouse. Did you know you can contribute earned income to a nonworking or low-earning spouse’s IRA if you file a joint tax return as a married couple? These are known as spousal IRAs and are treated just like traditional IRAs, reducing pretax income. They are not joint accounts—the individual spouse owns each IRA, and you can’t do this with a Roth IRA. There are specific guidelines, such as the working spouse must earn at least as much money as they contributed to both of the couple’s IRAs.

Qualified charitable distributions. Seniors who make charitable donations by taking money from their bank account or traditional IRA and then writing a check from their bank account is a common tax mistake. It is better to use a qualified charitable deduction, or QCD, which lets seniors age 70 ½ and older transfer up to $100,000 directly from a traditional IRA to a charity tax-free. Married couples filing jointly can donate $200,000 annually, and neither can contribute more than $100,000.

The contributions must be made to a qualified 501(c)(3) charity. The donation can’t be from Donor-Advised Funds. This is a great option when you need to take the annual withdrawal, known as a Required Minimum Distribution or RMD, and don’t need the money.

Medicare premium deduction. A self-employed retiree can deduct Medicare premiums even if they don’t itemize. This includes Medicare Part B and D, plus the cost of supplemental Medigap policies or a Medicare Advantage plan. The IRS considers self-employed people who own a business as a sole proprietor (Schedule C), partner (Schedule E), limited liability company member, or S corporation shareholder with at least 2% of the company stock.

Remember, you must have business income to qualify, since you can deduct premiums by only as much as you earn from your business. You also can’t claim the deduction if your health insurance is covered by a retiree medical plan hosted by a former employer or your spouse’s employer’s medical plan.

Seniors should consult with an estate planning attorney make sure they are not missing out on possible tax deductions. If you would like to learn more about tax planning, please visit our previous posts.

Reference: The Wall Street Journal (Nov. 29, 2023) “Four Lucrative Tax Deductions That Seniors Often Overlook”

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Trust can be Designed to be Millennial Friendly

March 22, 2023

If your named beneficiaries are Millennials—born between 1981-1996—you may want to consider three essential points about your trusts, as explained in the recent article “Trusts For Your Millennial Beneficiaries” from The Street. They’re different from their parents and grandparents, and disregarding these differences is a missed opportunity. Your trust can be designed to be Millennial friendly.

This generation’s distinguishing characteristics and traits include:

Valuing relations with superiors with a passion for learning and growth.
Desire to live a life with meaning and make a positive impact on the world and causes.
Creative and free thinking, looking for outside-the-box solutions and opportunities.

If your estate plan benefits Gen Y, some trust features recommended for Millennials may not be optimal for them. They’re different than their older Millennial counterparts.

Have your beneficiary serve as a co-trustee of their trust alongside an experienced advisor. Millennials appreciate the opportunity to ask for advice from a trusted advisor, secure positive reinforcement and get constructive feedback. Many heirs set to come into money are likely to work with an advisor once they inherit. For them, a co-trustee arrangement could be perfect. Consider naming a family member or friend with a background in finance as their co-trustee or naming a corporate trustee.

Consider giving your beneficiary a limited testamentary power of appointment to support their favorite charity. Millennials want to make a positive impact on the world, and there’s a trust feature you can build into a trust to support this goal: a limited testamentary power of appointment. In broad strokes, this gives the trust beneficiary the power to redirect where assets go upon their death. If the scope of power permits, they could redirect assets to charitable organizations of their choice.

Most people design trusts to last for the beneficiary’s lifetime and then structure the trust so assets remaining at their death will pass in trust to their children in equal shares. Trusts can also be created to change the distribution percentages between recipients. For instance, instead of a 50-50 split, the trust can redirect shares of 70-30 to better accomplish their personal objectives. You can also provide for new beneficiaries, like charities, if they weren’t part of the original trust.

Powers of appointment can be complicated and making them overly broad can have serious and adverse tax consequences. Therefore, speak with your estate planning attorney to make sure the scope of power is clear and properly designed.

Broadly define the standards for which distributions can be made to your beneficiary. Millennials think differently, so the commonly used trust distribution standards of health, education, maintenance and support (“HEMS”) may stop them from being able to tap into trust funds for philanthropic or entrepreneurial efforts. The HEMS standard only allows for distributions generally for purposes to align with the beneficiary’s current standard of living. If you want beneficiaries to be able to do more, they need to be given the ability to do so.

Another way to accomplish this is to allow a disinterested trustee (someone who is not a beneficiary) an expansive distribution authority. Having the ability to make a distribution of trust funds to your beneficiary for any purpose can be a little unsettling. However, naming a disinterested trustee you trust will ensure that funds are distributed responsibly.

Leaving assets in trust for beneficiaries can be part of an effective estate plan supporting planning goals and your loved one’s future. However, if the trust’s structure doesn’t meet their unique needs and talents, then their potential may be dimmed. Talk with your estate planning attorney about how a trust can designed to be Millennial friendly. If you would like to learn more about trusts and wills for younger adults, please visit our previous posts.

Reference: The Street (Feb. 24, 2023) “Trusts For Your Millennial Beneficiaries”

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Planning items to consider in your 50s

January 19, 2022

Many financial planning articles are geared towards people starting out or those nearing retirement. But what about people in their 50s? The Street’s recent article entitled “5 Things to Do in Your 50s,” says that they need help, too. Here are five simple planning items to consider in your 50s.

Maximize your retirement plan. When you turn 50, the IRS lets you contribute more to your retirement accounts each year. Known as “catch-up contributions,” if you have the cash flow, take advantage of this.

Fund a Health Savings Account (HSA). If you’re eligible for an HSA, contribute to it! Even a small amount each year will make a difference.

Long-term care. Think about buying insurance to mitigate the risk of paying out of pocket for medical expenses. Age 55-60 is a good time for purchasing a policy, as they tend to be less expensive than purchasing one in your late 60s.

Review your estate planning documents. Your circumstances, financial condition and federal and state laws can change. Make certain that you review your estate plan every few years and keep it up-to-date.

Toss junk and focus on experiences. While not really financial planning-related, it’s important to speak with your children and friends and see if they want to rummage through boxes of old pictures, silverware and sweaters years from now. Probably not. They most likely would want you to keep what’s most valuable and toss the rest. Rather than spending money on keepsake items, perhaps spend it on trips with the family or meaningful experiences that your loved ones will cherish for a lifetime. You might also donate to a charity that enriches you and makes you feel fulfilled.

An experienced estate planning attorney will walk you through the various planning items to consider, now that you’re in your 50s. If you would like to read more about estate planning for older adults, please visit our previous posts.

Reference: The Street (Nov. 24, 2021) “5 Things to Do in Your 50s”

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Revise your Planning with a Second Marriage

April 19, 2021

It is wise to revise your planning with a second marriage. The assets you and your second spouse bring into the marriage need to be carefully considered when revising your estate plan, says a recent article “Value of an Estate Plan Review With a Second Marriage” from Mondaq. If there are children from one or both partner’s prior marriages, those too need to be considered. If you plan on having children together, the estate plan needs to include this as well.

The best time to prepare this new estate plan would be before the wedding. This way, you can both go forward with the wedding and celebration with clear minds and hearts.

Start with a complete inventory of all assets and debts. List financial accounts, including investments, savings and checking accounts. Real estate and any personal assets, pensions and tax deferred retirement accounts should be included.

Review your wills, trusts, health care plans and directives, powers of attorney and any other estate planning documents at this time.

There may be assets that need to be retitled, and beneficiaries on all assets that permit designated beneficiaries should be updated at this time. Check to be sure a prior spouse is not the beneficiary of any life insurance or pensions. Any debts or liabilities that one partner brings to the marriage should be reviewed at this time. Comingling accounts and marriage will make both spouses responsible for each other’s debts, which should be discussed candidly.

Based on the inventory, one or the other partner may wish to have a prenuptial agreement to protect their individual financial interests during a second marriage. A prenuptial agreement may also be used to waive respective rights to each other’s property. These agreements are also used to serve as a means of retaining control of a business and defining premarital assets and debt.

When children are involved, decisions need to be made as to how assets are to be divided. Does one spouse want to leave their assets to their own children or to all of the children?

One way of addressing children in a second marriage is to create a separate marital trust to ensure that the new spouse receives the share of the assets you want them to have, while preserving your children’s inheritance. In the case of IRAs, it may be prudent to split them into separate IRAs among your spouse and children to protect the children’s inheritance.

When naming new beneficiaries, be aware that your new spouse may have mandatory rights to certain assets, such as qualified retirement plans. The only person who can inherit a Health Savings Account (HSA) without it becoming taxable, is your spouse. Remember to change this from your former spouse to the new spouse. Naming your children as the beneficiary would cause the account to be taxable on your death.

There could be significant financial consequences if you fail to revise your planning with a second marriage. An estate planning attorney who has worked with second and subsequent marriages can help facilitate a discussion about structuring an estate plan. Working with a professional who knows how these situations are resolved can be a great help in getting the process started and keeping it moving forward.

If you would like to learn more about estate planning and blended families, please visit our previous posts.

Reference: Mondaq (March 2, 2021) “Value of an Estate Plan Review With a Second Marriage”

A Health Savings Account Can Be A Great Help

February 25, 2021

A health savings account can be a great help when it’s needed to tap the funds and it’s a tool to save money for retirement.

Money Talks News’ recent article “3 Ways a Health Savings Account Can Improve Your Finances” explains that a health savings account, or HSA, can help you stretch your health care dollars and build your retirement savings at the same time, provided you’re eligible for one and you spend the money in your HSA on eligible expenses.

Let’s look at the benefits of HSAs and tips for opening one:

HSAs are tax-free. Depositing funds in a health savings account is one of the very few ways you can do to entirely avoid paying any taxes on that money at any point. Compare that to money in tax-advantaged accounts, like 401(k)s and individual retirement accounts (IRAs), that may grow tax-free. However, you will pay taxes on at least the principal at some point.

However,with an HSA, you get a tax deduction for the money you put into the account. The earnings grow tax-free, and provided that you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.

HSAs are more flexible than FSAs. A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars.

However, FSAs have a big drawback: FSAs are subject to a “use-or-lose” provision. This means workers are usually required to spend any money in their FSAs within their health insurance plan year or else lose the money.

However, with an HSA, your money stays in the account and thus can grow year after year.

You can invest the money in your HSA. You are allowed to invest the money that’s in your HSA, so it can grow faster with investment options. The investment options will vary depending on where you open your HSA.

A health savings account can be a great help when your family is looking for ways to stretch their income farther into retirement. It is fairly easy to start an HSA, but you must be eligible for one. The IRS says that the primary requirement to qualify is that you are covered by a high-deductible health insurance plan. To open an HSA, you pick a custodian—an institution that offers HSAs.

If you are interested in learning more about HSAs and how they can benefit your family, please visit our previous posts.

Reference: Money Talks News (May 26, 2020) “3 Ways a Health Savings Account Can Improve Your Finances”

Category: HSA

Seniors are missing out on Tax Deductions

Trust can be Designed to be Millennial Friendly

Planning items to consider in your 50s

Revise your Planning with a Second Marriage

A Health Savings Account Can Be A Great Help

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