10 Overlooked Tax Deductions for Retirees

Photo-realistic, senior-friendly scene that visually introduces the section titled 'Understanding the Basics: Standard vs.

Understanding the Basics: Standard vs. Itemized Deductions

Before we dive into the specific deductions, it is crucial to understand the two main ways you can lower your taxable income. The IRS gives every taxpayer a choice: take the standard deduction or itemize your deductions. You get to pick the one that saves you the most money.

What is the standard deduction?

The standard deduction is a specific dollar amount that you can subtract from your income to reduce the amount of that income that is subject to tax. The amount is determined by your filing status (like Single, Married Filing Jointly, or Head of Household), your age, and whether you or your spouse are blind. It is the simpler option because you do not need to keep records of every single expense. The vast majority of taxpayers take the standard deduction.

What are itemized deductions?

Itemized deductions are a list of specific, eligible expenses that you can total up and subtract from your income. These include things like medical expenses, state and local taxes, mortgage interest, and charitable donations. To itemize, you must fill out a specific form called Schedule A, “Itemized Deductions,” and file it with your main Form 1040 tax return. You should only choose to itemize if your total itemized deductions are greater than your available standard deduction.

A Simple Example: The Break-Even Point

Let’s see how this works for a retired couple, John and Mary, who are 68 and 70 years old. They will be filing their taxes jointly.

First, we figure out their standard deduction. For Tax Year 2024, the base standard deduction for a married couple filing jointly is $29,200. However, the tax code provides an extra deduction for those age 65 or older. Since both John and Mary are over 65, they each get to add an additional amount. For 2024, that extra amount is $1,550 per person. So, their total standard deduction is the $29,200 base plus $1,550 for John plus $1,550 for Mary, for a grand total of $32,300.

Now, let’s look at their potential itemized deductions for the year:

Medical Expenses: They had significant out-of-pocket medical costs that exceeded the 7.5% of their income threshold, leaving them with $6,000 in deductible medical expenses.

State and Local Taxes: They paid $8,500 in state property taxes on their home.

Mortgage Interest: They still have a small mortgage and paid $4,000 in interest.

Charitable Donations: They gave $2,000 in cash to their local church and animal shelter.

To find their total itemized deductions, we add them up: $6,000 (medical) + $8,500 (taxes) + $4,000 (interest) + $2,000 (charity) = $20,500.

In this case, their total itemized deductions ($20,500) are much less than their available standard deduction ($32,300). John and Mary would be far better off taking the standard deduction, as it would lower their taxable income by an extra $11,800. This is a crucial calculation every retiree should do before deciding which path to take.

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