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With kids and mortgage gone, there are other options for seniors trying to reduce tax bills

01/13/2015 09:26 EST | Updated 03/15/2015 05:59 EDT
WASHINGTON - You've downsized to an apartment, the kids are long gone, and you're no longer eligible for some of the deductions and exemptions that had helped you lower your tax bill.

But for those 65 years or older, there are other tax breaks that might benefit you come tax time.

For one, not all your Social Security benefits are subject to federal taxes. How much depends on your other income and filing status.

"No one pays federal income tax on more than 85 per cent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules," the Social Security Administration says on its website.

To determine what per cent of your benefits might be taxable, add half your benefits to your other income, including nontaxable interest. If your combined income is between $25,000 and $34,000 and your filing status is single, up to 50 per cent of your benefits might be taxable, according to the IRS. For married couples filing jointly, the 50 per cent taxable figure applies if your combined income is between $32,000 and $44,000.

Combined income lower than the threshold? Social Security benefits aren't taxable. If the combined income is above these income ranges, up to 85 per cent is subject to income taxes.

Be sure to check your state tax laws. In many states, you won't have to pay state tax on all or some of your Social Security benefits.

People 65 and over also should consider whether it's more beneficial for them to claim the standard deduction or to itemize.

The standard deduction is higher for seniors — $7,750 if your filing status is single, $14,800 if you're married filing jointly and you and your spouse are both at least 65. That compares to $6,200 for single filers under 65 and $12,400 for married taxpayers under 65 who are filing jointly.

"Seniors very often have already paid up their mortgage and they very often don't itemize anymore," said Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block.

But it's important to do the math — or let your tax preparer or tax software do it for you — to see whether it still makes sense to itemize even with the higher standard deduction.

Even if you don't have mortgage interest to deduct, you can still deduct any property taxes you paid. State income taxes also are deductible, or alternatively, you can choose to deduct state sales taxes, an attractive option if you live in a state that doesn't have an income tax.

For seniors, medical expenses have to exceed 7.5 per cent of adjusted gross income to be deductible. That threshold applies even if only one spouse has reached 65 and you file jointly. For those under 65, medical expenses are deductible only if they exceed 10 per cent of your adjusted gross income.

And medical bills can be hefty for seniors. Covered medical expenses include the portion of doctor, dentist and hospital bills and the cost of prescription drugs not covered by insurance, as well as premiums for Medicare or other insurance coverage. Prescription eyeglasses are deductible, as are the cost of false teeth, hearing aids and wheelchairs. So is the cost of transportation to medical appointments.

Charitable donations also are deductible.

However, seniors who are at least 70 1/2 had another option for charitable donations. At that age, you're required to take a minimum distribution for your individual retirement accounts. If you rolled that distribution over directly to a charity — instead of taking the money and then donating it — the distribution is not counted as income and therefore is not taxable.

"The difference is you're lowering not only your taxable income but also your adjusted gross income," Perlman said. And that can affect such things as whether Social Security benefits are taxable and whether you can deduct your medical expenses.

But there's no double-dipping. If you itemize, you can't also deduct a charitable donation that was made through a direct rollover from an IRA.

There is also a small tax credit for low-income seniors, which Perlman says is not widely used. "It might be helpful for someone who neither contributed to the Social Security system nor ever married."

The IRS offers free tax help for people 60 and older, working through non-profit groups like AARP Foundation.

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