How Retirees Can Save on Their Taxes

As a retiree, you may have stopped receiving a paycheck but you still receive income. And where there's income, there are taxes. Retirees still need to file tax returns each year but many miss out on some basic deductions that can easily cut their tax bill.

To make things easier, many retirees can use the simplest tax form, Form 1040EZ, to submit as mail-in or on line. IRS offices will help fill out the form without charge. To complete tax forms, gather all paperwork from last year and have proof of all expenses and potential deductions. Here are five tips for retirees to save money on taxes:

Medical and Dental Expenses
Your health insurance and Medicare may cover most out-of-pocket medical costs. However, there are often medical expenses that won't be reimbursed, and can be tax-deductible. They may include insurance premiums, prescription and over-the-counter drugs and other out-of-pocket heath care expenses.

Additionally, many seniors forget to deduct all transportation costs to pharmacies, physicians and hospitals. By air, car or public transportation for medical reasons, these expenses can be considerable. If you spend money on medical care and your insurance or Medicare doesn't pay for it, it's usually deductible.

Retirement Plan Contributions
Although you're retired, you can continue to put away contributions to tax shelters such as SEPs and Roth IRAs. Rules change almost every year but current laws allow substantial contributions to both types of plans no matter how old you are, which may greatly reduce your tax liability.

Investment Expenses
Savings-conscious people regularly put money in investments during their working careers. They set up plans where percentages of regular salaries go into money-market, fixed-interest bank accounts and market-based stock purchases. Once retired, interest earned on these assets can add to monthly income, along with Social Security and other retirement pay. Post-retirement income may be taxed. Since it's likely you'll be making less money than during active years, and with some retirement-only deductions, your tax obligations may be less.

As with medical expenses, fees you pay for investment advice, stock purchases, as well as online and bank services, are deductible. The declining economy has caused many retirees' stocks, real estate and other investments to become worth less than prices originally paid for them. If it happened to you, seek advice about taking a capital-loss income deduction, which also may be possible against prior-year profits.

Business Expenses
Many retirees continue to work. It may be full-time, part-time or as consultants. Some who own businesses opt to stay active. For those tax payers, there are many ways to save on income taxes. Deductions could include travel for business, professional memberships, new equipment, repairs, maintenance, as well as office and shop rentals. Keep in mind the IRS may allow a year or two of of losses before a business makes a profit.

Charitable Contributions
Retirees may donate up to half of their adjusted annual gross income to charities, educational institutions, religious and other non-profit organizations, per IRS rules. Other tax-deductible gifts include real estate, automobiles, boats, airplanes, shop and office equipment, even stocks and bonds. Tax deductions may be credited at current retail prices.

Because the laws change every year and everyone's situation is different, I suggest you always consult with a tax professional to make sure you pay the minimum taxes allowed by law. But the more you know personally always helps and can help you plan for future years as well.