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This Big Tax Deduction Will Help Many Retirees
February 9, 2021
Once you retire, income taxes don’t exactly go away. But because your income as well as your budget look a bit different at this time, you need to become familiar with all of the tax breaks available to you.
Technically, this tax break is available to anyone who itemizes deductions on their income tax return. So you can use it during your working years, but it will become particularly important during retirement. Why? Because it concerns out-of-pocket medical spending, which tends to impact retirees more than any other group.
How the deduction works.
For several years, taxpayers were allowed to deduct any out-of-pocket medical expenses that exceeded 7.5 percent of their adjusted gross income. But per the Affordable Care Act, that threshold was scheduled to climb to 10 percent this year, meaning you could only deduct expenses that exceeded 10 percent of your AGI.
What has changed.
Fortunately, back in December 2020 Congress recognized that many taxpayers not only suffered through a tough year financially; many also experienced higher medical bills than usual. Thanks to quick action in Congress in late December, that threshold for deducting expenses was permanently set to 7.5 percent (avoiding the looming higher threshold).
What that means for you.
Let’s assume a retiree has a taxable income of $50,000 per year. If your out-of-pocket medical spending exceeds 7.5 percent of your AGI, or $3,750, you can deduct the balance of those expenses on your income tax return. So, if your spending is $6,750, $3,000 of those medical bills are deductible when you do your taxes in the spring.
Making this tax break permanent will help many retirees who tend to spend more on healthcare than most other groups. But we still urge you to meet with us regularly, to plan your retirement budget carefully and prepare for unexpected expenses.
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