Tax Planning Can Affect Estate Planning
With April 15 upon us, it is an appropriate time to discuss some deductions available to senior clients and prospective clients. But first, as disclaimer: I am not an accountant or tax attorney, and do not give tax advice. The information contained herein is public knowledge and can be found on the IRS website. When preparing your taxes, it is always advisable to do so with the assistance of a CPA. We have many on hand to refer if you require. Please feel free to contact us for a referral.
Many of my clients are older, and come in to discuss their estate plans. When doing so, they have many tax related questions. I therefore have found it useful to have a rudimentary understanding of the tax code, but always make sure that a client also consult with a CPA for any complicated tax issues.
However, many of my clients file their taxes on their own, so I researched some useful information concerning deductions for seniors over 65. Below is a list of deductions that you may take advantage of under certain circumstances. I would also encourage you to at least review the IRS website (www.IRS.gov) or speak to a CPA.
- Selling your home. Many “empty nesters” that I represent sell their homes after retirement to downsize and reduce their living expenses. This will oftentimes amount to a large gain. While South Carolina does not withhold taxes for the sale of a home by a resident, the Federal government does tax the gain. However, if you are age 65 or older and have lived in your home for two of the last five years, the profit you make is not taxable (up to $250,000.00 of profit for singles and $500,000.00 of profit for married couples filing jointly).
- Retirement plan contributions. You may make tax free contributions to retirement plans even after you retire. Contributions to ROTH IRAs are taxed, but the withdrawals are tax free.
- Medical and Dental expenses. For many seniors, medical expenses are the highest expense annually. Many of these expenses are tax deductible for seniors, such as the following: health insurance premiums (including Medicare), long-term care premiums, prescription drugs, nursing home care and most other out of pocket expenses.
- Investment expenses. Interest, dividends and capital gains from investments are not subject to Social Security or Medicare taxes. Additionally, dividends are taxes at a lower rate than ordinary income. The best part for seniors is that professional fees and expenses related to investments are deductible to the extent that they do not exceed 2% of your adjusted gross income after you include you other itemized personal deductions. These include: Attorney and CPA fees; safe deposit box fees; home computers for investment use; fees to financial planners; subscriptions to investment newsletters; broker fees, bank fees and trustee fees; and fees for online services.
- Business expenses. If you retire but still operate a small business, or set up a corporate entity to perform consulting services for the company you have retired from, your business expenses are tax deductible.
- Charitable contributions. Be sure to review IRS guidelines as to what is deductible and what is not. Cash contributions up to 50% of your adjusted gross income is tax deductible.
- Standard deductions. You qualify for a higher standard deduction if you are age 65 or older. You may also qualify for a credit for the elderly or disabled if you and your spouse ate over 65 or permanently and totally disabled; your income on form 1040 line 38 is less than $17,500.00, $20,000 (married filing jointly and only one spouse qualifies), $25,000.00 (married filing jointly and both spouses qualify), or $12,500 (married filing separately and lived separate and apart for the entire year); and the non-taxable part of your Social Security or other non-taxable pensions is less than $5,000.00. Remember you must file using form 1040 or 1040A (and NOT 1040EZ) to qualify for this credit.
I hope you find this useful. If you wish to set up a consultation to discuss your estate plan, please feel free to contact us at (843) 903-1212 to set up a consultation.
The Law Office of Dennis J. DiSabato, Jr., LLC
3888 Renee Drive, Suite 201
Myrtle Beach, SC 29579