If you are a baby boomer edging toward retirement – and wondering how to reduce your tax burden in the meantime – you may be in luck. Depending upon your circumstances, you may be able to take advantage of a couple of sweet tax deductions that can save you pots of money starting right now, as well as continuing through the next few years leading up to retirement.
Best of all, these particular tax benefits just get better with age.
Long-term insurance premiums
It is often difficult to collect enough medical bills to make use of the deduction for medical and dental expenses – which must now exceed 10% of your adjusted gross income (for those 65 or older, the rate is still 7.5%). There may be some expenses that you don't know you may deduct, however, and adding them all up can push you over the law's threshold.
Long-term care insurance policy premiums are usually deductible, and the amount you may deduct increases as you age. For example, the allowable deduction is capped at $680 if you are between the ages of 41 and 50, but jumps to $1,360 when you turn 51. At age 61, the cap rises to $3,640. For many people, this robust deduction can form the foundation upon which other medical expenses can be added, enabling older Americans to take advantage of the medical expense deduction.
Health Savings Account
If you participate in a high deductible health plan and are not yet enrolled in Medicare, a Health Savings Account could be a real boon, saving you a hefty amount on your yearly taxes, as well as adding to your retirement cushion.
An HSA can be opened by anyone with a qualifying health care plan, and must be administered by a trustee – which can be any entity approved by the IRS to administer individual retirement accounts. Each year, you put pre-tax dollars into the account, which can then be used to pay qualified medical expenses until the deductible kicks in. Because you are paying for medical costs, the money is tax-free when you withdraw it, as well.
I'll bet you are already seeing the value of such an account, which offers great benefits. Individuals can contribute $3,250 annually to their accounts, families up to $6,450. If you are over 55, add another $1,000 to each of those contribution limits.
Taking this amount off your gross income is swell in and of itself, but the benefits go well beyond this perk. For instance, there is no requirement you spend all of your HSA contributions in any given year, so the kitty can really add up. Money from this account may also be used to pay long-term care insurance premiums, and the account belongs to you, so it is entirely portable. After age 65, you may use money in the account for purposes other than medical expenses without penalty, although you will have to pay income tax on the withdrawals.
Taking advantage of these health care-related deductions can really help lower your tax burden right now, something that becomes more important as retirement looms. And, unlike many other things in life, they actually become more attractive as the years go by.
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