It's getting close to tax season again, and if you're an older adult who still has to report an income to the Internal Revenue Service or owns property in Colorado, you might wonder if there are ways to save on your tax bill this year.
Taxes can be complicated, and that doesn't change with retirement. If you're not sure if you need to file taxes or what credits and deductions you can claim, it may be a good idea to consult with a tax professional. You might also use tax preparation software that walks you through the process and asks questions to help determine whether you should claim certain expenses.
Make sure you're prepared for tax season this year by starting with some basic information about common deductions, credits and exemptions for seniors in Colorado below.
What you pay out over the course of the year for medical and dental care can be claimed as a deduction on your federal tax return. This can potentially reduce how much you owe in taxes or increase how much you're refunded.
The types of expenses that can be deducted include:
• Premiums that you pay for health insurance coverage, including any premiums you pay for Medicare or long-term care insurance
• Costs of prescription drugs that you pay out of pocket
• Any expense associated with medical or dental care that you cover, including copays and deductibles
You're only able to claim a certain amount of these expenses, though. In 2021, for example, you can only claim up to 10% of your adjusted gross income in medical expenses. You also have to take itemized deductions and not the standard deduction (you can only pick one). So, it's important to check to see if you have enough itemized deductions to make it worth going that route.
Seniors who live in and own their own home can apply for a property tax exemption in Colorado. To qualify, you must have owned the home for 10 years in a row and lived in it for the same time period.
To get the exemption, you have to apply by July 15, and the exemption only applies to the application year. The exemption amount may be different each year and is controlled by the legislature of the state.
As an aside, if you decided to sell your home to move into an assisted living community, such as the one at Collinwood in Fort Collins, you might not have to pay taxes on any of the income associated with the sale. Consult your financial advisor and real estate agent, but most of the time, you don't have taxes on home sale proceeds of up to $250,000 (or $500,000 if you're married and file a joint tax return).
If you make tax-deductible charitable contributions during the year, you can add those to your itemized deductibles for your federal income taxes. Again, this is only possible if you choose to take the itemized deduction and not the standardized deduction.
However, seniors who are particularly giving or those who tithe to their churches might have enough contributions to make this effort worth it. This is especially true if you have medical and other tax-deductible expenses too.
It's worth noting that the CARES Act makes it possible to take a deduction of up to $300 of charitable donations without itemizing. That means you can take that deduction even if you use the standard deduction.
If you're still contributing money to a qualifying 401(k), Roth IRA or traditional IRA, you can claim that amount on your annual deductions. There are limitations to how much you can contribute in tax-deductible income each year, though, so you should always check the contribution limits before you plan your savings and spending for the year. This may be a good time to get a financial advisor or accountant involved to help you ensure you're managing finances in a way that supports a stable future.
This is a federal tax credit that can help reduce how much you owe in taxes. According to the IRS, to be eligible for this credit, you must be 65 before the end of the tax year or you are retired due to permanent disability and receiving disability income. You also have to meet certain income restrictions.
Being prepared for tax time can help reduce the stress of filing taxes and ensure you get any refund faster. Take some time now to start gathering documents you might need, and watch your mailbox and email for information from banks, pension plans, employers, mortgage lenders and anyone else who might send you information relevant to your taxes.
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