As you reach retirement age, many people have larger medical expenses or sell their home. It is important to understand how these life events can affect your taxes. Here are some tax tips on what you need to do if you have large medical expenses or sell your home.
Medical and dental expenses
Medical and dental expenses are often one of the largest expenses for retirees; fortunately, some of these expenses are deductible. Deductible expenses include health insurance premiums (including Medicare), long-term care insurance premiums, prescription drugs, nursing home care, and most other out-of-pocket health care expenses.
If you itemize your deductions, medical and dental expenses are deductible from your income taxes on Schedule A of your tax return. However, they are subject to a limit. For many years, the limit was 7.5% of a taxpayer’s adjusted gross income (AGI), meaning that only those expenses in excess of 7.5% of a taxpayer’s AGI were deductible. For example, if someone’s AGI was $100,000, only those medical and dental expenses above $7,500 (7.5% x $100,000 = $7,500) would be deductible.
Starting in 2013, the rules for deducting medical and dental expenses changed. For taxpayers under 65 years old, the 7.5% threshold was increased to 10% so only medical and dental expenses in excess of 10% of a taxpayer’s AGI are deductible. This means people cannot deduct as much of their medical costs as they have been able to in prior years.
In creating the new rules for deducting medical expenses, Congress exempted people age 65 and older from the 10% threshold increase until 2017. Thus, anyone age 65 or older can use the 7.5% threshold for deducting medical and dental expenses for any tax year ending before January 1, 2017, as long as the taxpayer or his/her spouse was age 65 during or before the tax year.
To learn more, see Publication 554, Tax Guide for Seniors (available on the IRS website).
Selling your house
Retirees often sell their homes to move into smaller homes or retirement communities. If you’ve lived in your home for a long time, you probably have substantial equity and will earn a profit or gain on the sale. Fortunately, you may not have to pay any tax on your profit. As long as you live in your home for at least two out of the five years before you sell your house, the profit you make on the sale (up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly) is not taxable.
Contributed by Andrea McClure. Andrea joined Chemung Canal Trust Company in 2014 as Manager of Tax Services in our Wealth Management Group.
For additional guidance, please contact Marci Cartwright at 607-737-3754 or email@example.com.