Month: November 2022

[Last updated October 26, 2023]

Before you reach retirement age, consider how to prepare yourself financially. Familiarizing yourself with new tax deductions and credits for seniors can be beneficial. Here is everything you need to know about tax deductions and credits for seniors for the 2023 tax year.  

What are tax deductions and credits? 

Before you begin, you must understand what tax deductions and credits are. A tax deduction lowers your taxable income, reducing the amount you owe in taxes. A tax credit is money subtracted directly from what you owe. 

Important senior tax deductions and credits 

Knowing which deductions and credits apply to you as a senior is crucial to make the most of your money in retirement. Let’s break down the important deductions and credits for seniors.

Increased standard deduction and additional deduction for seniors

The standard deduction for the 2023 tax year has increased due to inflation. The new standard deduction for married couples who intend to file together is $27,700, a $1,800 increase from tax year 2022. The standard deduction for married couples filing separately or for single taxpayers is $13,850, an increase of $900 from 2022. Adults 65 and older are eligible to take an additional deduction of $1,500 (married) or $1,850 (single) on top of the new standard deduction for 2023. Note that the IRS considers you 65 the day before your 65th birthday.

Business and hobby deductions 

When seniors retire from full-time jobs, many enjoy relaxing and living the good life. Others choose to embark on newfound adventures and hobbies. Many seniors work as consultants, freelancers, or contractors, and some even start their own businesses. 

The line between business and hobby can be muddy. According to the IRS, the difference between the two lies in the fact that one is for fun and one makes you money. If you receive more than $600 for your goods or services — even if you use online marketplaces or payment apps — you may receive a Form 1099-K. All profits that you make are taxable. Although you are paying on your profit, you may be eligible for deductions and other write-offs related to your business, including but not limited to: 

• •Home office deduction. 
• •Heating and cooling expenses.

• •Phone and internet expenses. 
• •Professional cleaning fees. 
• •Home office equipment. 
• •Stationery. 
• •Depreciation of office furniture and technology. 

Medical expense deductions 

As you age, your medical expenses likely will increase. You can expect to pay more for your health and wellness, whether because of increased doctor visits or attending to more health issues. When you itemize the costs of your medical expenses, you can deduct them from your income taxes. The deductions are limited to 7.5% of your adjusted gross income (AGI). 

You may be eligible for tax deductions from the following: 

• •Mental health services. 
• •Prescription costs. 
• •Optometrist visits and glasses. 
• •Home health care and aide services. 
• •Health insurance premiums. 

• •Dentures or additional dental services. 
• •Medical travel expenses, such as parking fees and transportation costs. 

Charitable contributions 

If you give to charity, you might be eligible for a tax deduction. When you donate money or items to a qualified charitable organization, you may be allowed to deduct the amount donated or the property’s fair market value. If you donate a car or boat valued at over $500, note that your deduction is capped to the gross proceeds from the sale of your donation. 

Charitable deductions apply only when you itemize. The best way to get the highest deduction is to make all your yearly contributions within the same year as opposed to once every year (for example, donating on January 1 and December 31 of the same year, essentially doubling your yearly contributions).

Social Security 

Depending on the situation, some older adults may have the luxury of not filing for taxes at all. Once they turn 65, they have a different filing threshold. You do not need to file taxes if you’re over 65 and making less than $14,050 as a single filer or $27,400 as a married filer. If your main income is a pension or Social Security, you may not be required to file taxes, as earnings from Social Security are often exempt from federal income taxes. 

You may not have to file taxes if your Social Security payments and other earnings are less than $25,000 annually. Individual filers with a total gross income, including Social Security, of over $25,000 and married couples filing jointly earning over $32,000 are taxed on up to 50% of their Social Security income. Individuals earning over $34,000 or couples earning over $44,000 will be taxed on up to 85% of their Social Security benefits. 

Credit for the elderly or disabled 

There is a tax credit for people over 65 and those under 65 with a permanent disability. Depending on filing status and income, it ranges from $3,750 to $7,500.  

This tax credit equals 15% of the original amount owed in taxes, which is subtracted from what you owe. 

You must meet multiple retirements to use this tax credit — and these specifications can change each year. To ensure you qualify for this tax credit, try using the IRS interactive tool or speak with an accountant.

Estate and gift tax 

You can make an annual gift to any one person of up to $17,000 without incurring a gift tax. This amount may change in the coming years. Spouses can also “split” gifts, doubling the amount a married couple can gift annually. Regarding estates, you can leave up to $12.92 million to family or friends free of any federal estate tax. 

Retirement plan contributions 

The maximum retirement plan contribution will increase, allowing individuals to contribute up to $22,500 to their 401(k), 403(b), and the majority of 457 plans and up to $6,500 to IRAs.  

When you contribute to a retirement account, you often can receive a saver’s credit, which lets you deduct a portion of your retirement contribution from the amount you owe the IRS in taxes. A nonrefundable saver’s credit helps to reduce the tax liability you owe, but you won’t receive a refund from the IRS for anything left over. The maximum AGI to be eligible for the saver’s credit — or retirement savings contribution credit — has increased to: 

• •$73,000 for jointly filing married couples. 
• •$54,750 for heads of household. 
• •$36,500 for individuals or separately filing married couples. 

Bottom line 

Knowing your tax deductions and credits can greatly benefit you as a senior. You can receive many different tax deductions after the age of 65. If you are in retirement, you may receive even more benefits, tax deductions, tax exemptions, and tax credits. Each year, the rules change, and it is vital to stay on top of them to get the most rewards.

[Last updated November 10, 2023]

Caring for an older adult, such as a parent or spouse, can be rewarding — but it can also require significant time and resources. To alleviate some of the financial impacts, there are multiple tax-deductible expenses caregivers should know about. When you take a look at your caregiver expenses, consider the rules we cover here for the 2023 tax season.

Caregiver expenses for tax deductions

When caregivers incur expenses for providing care to a loved one, they may be able to deduct some of those expenses during tax time. Certain types of expenses are not eligible, though, so it’s important to know whether your expenses qualify.

Caregivers of seniors can deduct several itemized expenses related to caregiving. Eligible deductible expenses include:

• •Assisted living and nursing home costs, when incurred for medical reasons.
• •Home health aide costs incurred during respite care.
• •Medical and therapeutic services, including physical and occupational therapy. This includes any copayments or deductibles that have not been reimbursed.
• •Prescribed medication and medical equipment, including hearing aids and walkers.
• •Transportation for medical appointments or services.

Any costs not deemed necessary to the care of the older adult are ineligible and include:

• •Cosmetic surgeries, unless necessary following a disfiguring disease, an accident, or trauma.
• •Nonprescription medication — except insulin — and illegal or non-FDA-approved medications.
• •Other non-care-related expenses, including life insurance policies, funeral costs, or travel recommended by a doctor for respite.

Rules for expenses to be tax deductible

The IRS allows caregivers to deduct medical expenses they cover for their older adult dependents under certain circumstances:

• •The older adult was the caregiver’s dependent at the time the expense was paid. The IRS can consider a taxpayer’s parent a dependent if they are a qualifying relative.
• •The caregiver itemizes their deductions.
• •The amount of expenses they can deduct is more than 7.5% of their adjusted gross income (AGI). The IRS considers gross income to be “wages, dividends, capital gains, business income, retirement distributions,” and other income. The gross income is adjusted when subtracting “educator expenses, student loan interest, alimony payments or contributions to a retirement account.” When a taxpayer tallies qualified medical expenses paid in a tax year, the amount over 7.5% of their AGI can be deducted. 

Caregivers who want to deduct expenses should ensure they pay for care from an eligible account. Medical expenses paid for from flexible spending accounts (FSAs) and health savings accounts (HSAs) are not deductible because you have not paid taxes on the money in those accounts.

FSAs and HSAs pull from pretax earnings and deposit the funds into a medical savings plan. These funds can be used for out-of-pocket health care costs for individuals and their dependents. It’s important to know that if a caregiver uses an FSA or HSA to pay for a given expense, they cannot also deduct that expense from their taxes.

Tax credits for caregivers of older adults

Caregivers may also qualify for tax credits if they meet the requirements. These tax credits can help ease the financial burden of providing care for a loved one. Here are the types of tax credits and how a taxpayer qualifies for them.

Types of tax credits

Two major federal tax credits are available to taxpaying caregivers of older adults: the child and dependent care credit and the credit for other dependents.

The child and dependent care credit is a refundable tax credit based on caregiving costs. These costs may include home care, adult day care programs, and other expenses allowing the taxpayer to work or actively seek work. Family caregivers can claim up to $3,000 in caregiving costs for a qualifying dependent.

The credit for other dependents is a nonrefundable tax credit of up to $500 for qualifying dependents, including older parents or relatives. This credit begins to phase out for single taxpayers earning over $200,000 or married couples filing jointly earning over $400,000.

Rules and regulations to earn a tax credit

To qualify for the child and dependent care credit, the following requirements must be met:

• •Need for care: The older adult is not capable of self-care.
• •Cohabitation: The older adult has lived with the caregiver for at least six months during the tax year.
• •Dependence of the older adult: The older adult is the taxpayer’s dependent or would have been if not for their maximum gross income amount and/or a joint filing with a spouse.
• •Necessity of care for employment: The taxpayer pays an outside care provider that enables the taxpayer to work or actively seek work.
• •Spousal qualifications: If married, the taxpayer’s spouse is also employed, a student, or disabled — in other words, they cannot provide care while the taxpayer is working.

For those seeking the credit for other dependents, the following requirements must be met:

• •Dependence of the older adult: The older adult lives with the taxpayer, who pays over 50% of the individual’s living expenses.
• •Income: The older adult’s gross income does not exceed the cutoff amount in a given tax year.
• •Legal residency: The older adult is a U.S. citizen, national, or legal resident with a valid identification number.
• •Living arrangements: If the older adult is a parent or relative, they have lived with the taxpayer for over six months. If the older adult is not a relative, they have lived with the taxpayer for the entire tax year.
• •Spousal status: If the older adult is married, they did not file a joint return with their spouse.
• •Non-dependence of the taxpayer: The taxpayer looking to claim a dependent is not a dependent of anyone else.

Caregivers who are unsure whether they can claim an older adult as a dependent should speak with a trusted tax professional. They also can use an IRS interactive tool to determine eligibility.

Family caregivers and employment taxes

In addition to tax deductions and credits, special tax rules for family caregivers apply. Caregivers are typically considered employees of the individual for whom they provide services. If the caregiving employee is a family member, the employer may not need to pay employment taxes; however, the employer must still report any caregiver compensation.

In some cases, family member caregivers are classified as independent contractors or self-employed rather than employees of the older adult. Generally, family caregivers will not owe self-employment tax as long as they are not providing services as part of an adult day care or other caregiving business.

Before a caregiver decides to deduct expenses on their tax return, they should always consult their trusted tax professional for guidance on complying with tax laws.

[Last updated November 1, 2023]

Retirement can be a wonderful time, as you can enjoy the fruits of hard work throughout your professional career. However, you must stay on top of your retirement finances, including taking your required minimum distribution. If not, it could cost you. Here is everything you need to know about your required minimum distribution, including why you must take it on time.

What is a required minimum distribution? 

A required minimum distribution (RMD) is the minimum amount of money you must withdraw from your retirement accounts every year once you reach a certain age.  

Most retirement savings accounts allow you to let your savings grow tax-free over the years of your working life. Doing so defers the payment of income taxes until you reach a specific age and begin retirement withdrawals. You must take the money out of the account, as the government receives long-awaited tax revenue. Withdrawing funds also ensures you are not accumulating tax-free wealth for the remainder of your life. 

The RMD requires you to take out a specific minimum amount — although you can withdraw more if you decide. You can also remove funds from these accounts and invest the money elsewhere before you reach the RMD age, reducing the minimum amount you must withdraw from the retirement account down the road. 

Retirement accounts with RMDs 

Several types of retirement accounts have RMDs: 

• •Traditional individual retirement accounts (IRAs).
• •SIMPLE IRAs. 
• •SEP IRAs. 
• •Traditional 401(k)s. 

• •Traditional 403(b)s.  
• •Profit-sharing plans.  

When do you need to start taking RMDs? 

The age at which someone must begin taking their RMDs has been raised to 73 from 72 for 2023. Note that if you were 72 in 2022, you are subject to the previous RMD age of 72. The legislation includes another change to the age in the future.  The new law constitutes the following: 

• •Anyone who reaches 72 years of age after December 31, 2022, and age 73 before January 1, 2033, must begin taking RMDs at 73. 
• •Anyone who reaches 74 years of age after December 31, 2032, must begin taking RMDs at 75. 

Please note that each year, the deadline for taking your RMD is December 31, yet you can delay taking your first RMD payment until the following April. If you choose this option, you must take your first and second RMD within the same year — which increases your income and, therefore, your income tax bill. 

If you are still employed and actively working by the time you reach your RMD age, you may be eligible to delay your first RMD from your current employer-sponsored retirement plan. To be eligible for this option, you must be less than a 5% owner of the business. 

How to take your RMD 

It’s a good idea to talk with a trusted tax professional or financial expert about how much to take for your RMD to ensure you withdraw the correct amount. Generally, people can take their RMDs when considering these steps:

Before taking your required minimum distribution, calculate how much you must remove from your accounts each year. First, find your life expectancy factor as determined in the Internal Revenue Service (IRS) life expectancy tables. Then, divide the year-end value of your retirement account by the distribution period that matches your age. Be sure to use your age on the last day of the year, December 31. Remember that you must calculate your RMD each year. 

Note that the distribution period will decrease yearly, so your RMD will increase. The reasoning behind this is that the distribution period matches your life expectancy with your remaining retirement account assets. Therefore, as your life expectancy decreases, the amount you need to withdraw from your accounts increases. 

As inconvenient as this mandatory increasing withdrawal sounds, senior health care, medical bills, senior living expenses, and more increase as we age. RMDs can be a great way to pay for the essential things you need as you age. 

What happens if you don’t take your RMD? 

It is crucial to take your yearly RMD or be willing to face the penalties. If you fail to take the RMD during the allotted timeframe, you will face consequences from the IRS. 

Historically, the rate of penalty — also known as an excise tax — sat at 50% of the amount not withdrawn. However, due to new legislation, the penalty has been lowered to 25%. If you are late in withdrawing the specific minimum distribution, contact a trusted tax professional who can guide you through which forms to complete and how to pay the penalty.

If you immediately remedy the issue, your penalty may be reduced from 25% to 10%. If you feel that there was a legitimate reason for you to have missed your RMD, request a waiver from the IRS and plead your case.  

Bottom line 

It is essential to remember to take your RMD each year to avoid significant penalties. These funds can be helpful toward medical bills and living expenses as you grow older and your needs change. Many retirement accounts utilize RMDs, so be sure to check the details of your accounts.

Talking about finances can be a sensitive subject — especially with family members. But if you’ve noticed a change in your aging parent’s mobility, independence, or cognitive function, it may be time to begin discussing senior care options. With that comes the conversation about how to pay for senior care.

If you and your family are in this situation or think you may be soon, here are a few tips for having the conversation and figuring out how to pay for senior care.

Identify who should be involved in the conversation

Before starting a discussion about family financial planning, figure out who should be part of the conversation. For instance, it may help to invite all adult children of the aging parents to participate in the discussion and discuss how they can contribute to care. If having another person present could help, you might consider agreeing upon a close family friend or another type of mediator to facilitate the conversation.

You may also need to eventually involve relevant professionals, such as an eldercare law attorney, the parent’s health care provider, or a financial planner. While these professionals may not be necessary for the initial conversation, you may need them when planning your parent’s estate, getting advice on their health, or planning to finance care. 

Tips for the discussion

Now that you’ve figured out who to involve, it’s time to have the chat. Here are some tips that can help you approach your family members as well as tips for the discussion itself:

Plan the discussion with the family in advance

Let your family members and parents know the topics you’d like to discuss with them before everyone gets together. Gauge their interest in advance so you’re not springing the conversation on them. This also allows everyone to bring some relevant research to the discussion.

Explain your intentions upfront

Before beginning the conversation, let your parents know you are facilitating it for their benefit. Mention that you’d like to ensure they have everything they need as they age. 

Ask your parents for their input

Take care to listen to your parent’s desires for their care and always consider their feelings and emotions. If they seem unswayed by your concerns, consider suggesting the parent talk with their healthcare or financial professional for third-party insights from which everyone can learn. 

Express empathy and patience while talking

Above all, ensure you practice kindness and patience with everyone involved in the discussion. If your siblings have differing opinions, give everyone a chance to express their feelings and devise solutions that can work for everyone involved. As part of the preparation, each person could jot down a few thoughts or priorities to refer to the list, and this may help the conversation continue to move forward.

Decide the topics to address

Talking about how to pay for senior care is a multi-step process. Addressing these topics in the order below can help you figure out the financial aspect of getting your parent the care they need.

Level of senior care the parent needs

One of the first steps in figuring out how to pay for senior care is to know what kind of care the parent needs. There are many types and levels of senior care, so you may be new to this and not know where to start. Begin by asking some of these discussion-starting questions to determine what care the parent may need:

• What household tasks are more challenging than they used to be? (Examples: Doing the laundry, vacuuming or mopping the floors, preparing meals, mowing the lawn)
• Are there any activities that are more challenging now? (Examples: Driving, grocery shopping, paying bills on time)
• What personal care tasks are more challenging to do safely? (Examples: Bathing, getting dressed, using the bathroom, moving throughout the house — this could mean transferring between the bed and a chair, walking up or down stairs, getting out of bed at night to use the bathroom, etc.)

Identifying the type of care a parent needs may not be a one-and-done conversation. These questions may start the discussion that you continue as a family to figure out what level of care is best. If you can’t come to an immediate decision about these questions, you can ask your parent to keep them in mind for a week or so, then return to the discussion in person, over the phone, or on a group family video call. 

Even when you have the answers to these questions, knowing what type of senior care is best for your parent can be challenging. Does the parent need to move to a facility, or should they have in-home care? You can research care facilities or work with a care placement expert to determine the proper senior care.

Cost of senior care

Multiple factors influence the cost of senior care. For example, the type of senior living community or care arrangement is a factor. Residential environments like independent living communities, assisted living facilities, and nursing homes vary in cost because they have a range of services and amenities. Home care services also range in scope and costs if the parent chooses to age in place and remain at home.

The cost of the care will greatly depend on the level of care the parent needs because that heavily influences the type of senior living community or home care they need. The cost of 24-hour care will differ from periodic home care services.

Where you live also influences the cost of senior care, and average prices vary from state to state. For example, Virginia has a lower-than-average cost of senior care, while Florida residents typically pay more than the national average for senior care. These costs also vary among cities within states, depending on the area.

Options for paying for senior care

Discussing finances with family members can be sensitive, but it’s necessary. It will be helpful to learn if the parent has retirement savings or other personal means to finance the cost of care. If so, what types of accounts do they have? How much funding do they have available? Are there limits to how much they can withdraw each month or year? 

If the parent has limited means, there are still many options to pay for senior care. You might suggest that everyone come to the conversation with research on financial resources available to help fund senior care.

 A few options include:

• Selling the family home. If the parent is moving to a senior living community, selling the house they lived in can provide funding to pay for care.
• Taking out a bridge loan. If the parent needs to move to a facility immediately, a bridge loan is a short-term loan that can help pay move-in expenses while you wait for other funding, like the sale of their home, to become available.
• Obtaining a personal loan. You can use various types of personal loans to cover your parent’s senior care expenses. Evaluate which is most feasible for your family’s situation.
• Using the parent’s long-term care insurance. Long-term care insurance covers various senior care services for older adults. If your parent has this type of insurance, you may be able to make a claim on it to help cover the costs of home care or other residential care settings.
• Access veterans benefits. If the parent who needs care is a veteran or the spouse of a veteran, they may qualify for certain VA benefits that help pay for senior care, such as the Aid and Attendance benefit. If the person who needs care meets specific military service, health, and income criteria, the benefit can provide over $2,000 per month of supplemental income. 
• Using the parent’s life insurance policy. Some life insurance policies can be sold, and you can use the money to help pay for their care. Talk to the insurance policy provider to see what the options are.

The bottom line

It is critical to ensure that older adults have the care they need to live comfortably and safely. Approaching the conversation with the right people involved, shared empathy and patience, and thorough research can help start the conversation. Senior care financial experts exist to help simplify this process so you and your family are not alone.