Tax rules and requirements change every year, so it’s essential to stay up to date regarding filing your taxes. Here’s what to keep in mind when filing your 2021 tax return.
1. The Increased Standard Deduction
The standard deduction is the universal amount you can deduct from your taxable income. You can either take the standard deduction or itemize deductions, whichever is higher, though about 90% of taxpayers take the standard deduction.
In 2022, the standard deduction is
- $12,550 for single filers,
- $18,800 for heads of households, and
- $25,100 for married filing jointly.
If you’re over 65 or blind, you can take an extra $1,350 deduction ($1,700 if filing single or head of household). If you are both over 65 and blind, that amount doubles.
2. Take Advantage of The “Extra” Charitable Giving Opportunity
Sustained charitable giving is an important goal for many retirees. The primary benefit of giving is donating your time, resources, and talents to organizations that matter to you. However, there are also financially-smart ways to go about your giving practice.
Retirees especially have unique opportunities even if they don’t itemize, including:
- Qualified charitable distributions (QCDs)
- The CARES Act enhanced charitable giving provision
QCDs enable you to donate to qualified charities directly from your IRA. Doing so can also help satisfy your required minimum distribution commitment for the year.
There’s also an additional opportunity to give back to charity. The CARES Act extended the ability for taxpayers to deduct $300 ($600 if married filing jointly) in cash contributions, even if they take the standard deduction. This rule encourages more broad charitable giving and makes it more accessible.
3. Contribute To Your 2021 Accounts
While you have to make contributions to your 401k by Dec. 31, you can contribute to your 2021 IRA and HSA until April 15, 2022. Doing so is an excellent way to max out your retirement accounts and keep saving. Here’s a quick recap on the contribution limits:
- $6,000 in an IRA with $1,000 in catch-up contributions if you’re 50 or older.
- $3,500 in an HSA for self-only coverage, $7,200 for family coverage, with an additional $1,000 in catch-up contributions if you’re 55 or older.
Keep in mind that if you’re enrolled in Medicare, you can’t contribute to an HSA, but if you earn any reportable income, you can contribute to an IRA.
4. Assess Your Medical Bills
Was 2021 a high-cost medical year for you?
If so, you may be able to write those costs off on your taxes. You can take a deduction if medical expenses exceed 7.5% of your adjusted gross income (AGI). Here’s the thing: you can only deduct expenses that are over 7.5% of AGI.
Let’s look at an example. If your AGI was $100,000, and you spent $10,000 in medical costs, you could deduct $2,500 (that’s the amount over $7,500).
Keep in mind that you must itemize to take advantage of this option. If you recently purchased long-term care insurance, you may also be able to deduct a portion of your premiums.
In 2022, the employee salary reduction for contributions to flexible spending accounts (FSA) is $2,850, meaning contributions could lower your AGI and, consequently, your tax bill.
5. Know The Taxable Portion of Your Social Security Benefits
Depending on your other income sources, a portion of your Social Security benefits—up to 85%—may be taxable if you have other substantial sources of income, like retirement savings or investments.
If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Anything above that and up to 85% of your benefits could be taxable.
If you file a joint return and you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. Again, exceed that number, and up to 85% of the benefit could be taxable.
In addition, if you’re married and file a separate tax return, you probably will pay taxes on your benefits. It’s important to double-check the Social Security worksheet when filing to determine whether or not you have to pay tax.
6. Look Into The Elderly and Disabled Tax Credit
Suppose you or your spouse is over 65 and has a permanent disability, meaning you have a disability that impacts the function of your daily life. In that case, you could be eligible for the elderly and disabled tax credit. The credit ranges from $3,750 to $7,500, depending on your filing status.
7. Plan Your Gifts
In 2022, the annual exclusion for gifts increases from $15,000 to $16,000. Splitting gifts with a spouse, a married couple could give $32,000 to any individual.
If you’re planning on gifting a sum of money to a friend or loved one, this is the highest amount you can give someone before you have to report the gift to the IRS via Form 709.
Tax season is a great time to take stock of your finances and start planning any financial gifts you may have in mind for the upcoming year.
Ready For Tax Time?
Once you file your tax return, what happens next?
Here are some factors for retirees to consider when reviewing their returns.
If you’re nearing retirement and need help with tax planning, we can provide the guidance you need to make sure that you get the most out of your money. By conducting tax planning as part of a comprehensive financial plan, you can avoid paying more tax than you have to.
Get in touch with us today to learn more!