The economy and volatile nature of the stock market have created financial challenges for many older taxpayers. If you feel like there's been an assault on your retirement nest egg, you're not alone. Here are ways to save money at tax time and avoid common filing mistakes that can cost you.
Take a higher standard deduction
If you don't itemize deductions, the IRS gives you a standard deduction amount that reduces your taxable income. For single and married filers, the deduction amounts are $5,700 and $11,400, respectively. If you're 65 or older, don't forget to claim an additional deduction of $1,100 for joint filers ($1,400 if single). Joint filers in this situation can reduce their taxable income by another $2,200 — not a bad savings! Unfortunately, if you itemize your deductions, there's no corresponding additional deduction.
Use stock losses to offset other income
Many of us sold stock at a loss in 2010. While no one likes losses, at least you can use capital losses up to $3,000 to offset other ordinary income. Even though this maneuver won't make up for your losses, it will lower your tax liability and mitigate some of the pain. By the way, if your net losses exceed $3,000, you can carry the excess amount over to use in 2011.
Review pension, retirement distributions
Pay particular attention to your state tax rules for pension distributions. Many states exclude from taxation certain types of pensions or allow partial exclusions. For example, some states exclude up to $20,000 of retirement income and others may exclude civil service employees' pensions in full. The rules vary from state to state, so it's important to do a little research to ensure you're not reporting more income than is required.
Also, make sure you properly account for the taxable part of your distribution, which is reported on Form 1099-R. Box 1 of this form reports your gross distribution while box 2a reports the taxable amount. Don't overlook the fact that the taxable amount may be less than the gross distribution amount.
Be sure to fully value your donations
If you're giving back to the community through volunteer work and by donating household items, you may have deductions that in the past you overlooked. Mileage incurred to volunteer at a soup kitchen or other charitable event can be written off at 14 cents per mile. When you donate your used household items, such as furniture, clothing and appliances, you're doing your community a favor and scoring a tax deduction at the same time. Surprisingly though, most people undervalue their donations, which means their tax write-off is understated.
Don't forget taxes on Social Security
If you grew up thinking Social Security benefits were tax-free, think again. If you're earning other income, some of your benefits may be taxable. The only way to tell is to go through the time-consuming task of figuring this out on the Social Security benefits work sheet. And don't forget that Social Security benefits include monthly retirement, survivor and disability income. They don't include supplemental security income payments, which aren't taxable.
Bob Meighan is a certified public accountant and vice president of TurboTax. All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser regarding your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.
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