During retirement, your tax filing plan can change significantly. New deductions may become available to you, others will become much more important and your overall strategy can change once you’re working with retirement funds instead of traditional taxed weekly income.
One important piece of the tax filing puzzle that retirees often overlook is how much they can benefit from utilizing their home for tax deductions. Certain deduction options can help you reduce your yearly taxable income, keeping more money in your pockets come April.
When filing your taxes for 2018, make sure you incorporate these important home-related deductions.
Home mortgage interest
If you still have a mortgage as you enter retirement, you can get some of that loan money back by deducting the interest you paid on the mortgage each year. In 2018, homeowners are allowed to deduct mortgage interest on personal residence loans up to $750,000.
This amount is a decrease from previous years, during which the mortgage principal limit was $1 million. Still, if you’re actively paying off a mortgage, the deduction can make a dent in your taxable income.
This deduction is also only available if you itemize your deductions.
Property taxes
If you paid property taxes on your home in 2018, you can deduct them if you itemize your deductions, as well.
Property taxes are bundled up with other forms of taxes, such as state income tax and state sales tax, to create the SALT (state and local tax) deduction. However, taxpayers beware: thanks to changes from the Tax Cuts and Jobs Act, SALT deductions are limited to $10,000 total per year starting in 2018.
Tax-free profits from home sales
This tax trick isn’t necessarily a deduction but can definitely be useful for retirees this year. Since retirement is an extremely popular time to sell your home, retirees who downsized last year should be sure to identify ways to eliminate tax on capital gains.
If you sell your home during retirement, you might make a substantial profit on the sale, which would normally require you to pay taxes on the capital gains. However, if you lived in your home for two out of five years prior to selling, a certain amount of the profit is not taxable. The tax break allows for up to $250,000 in profit for single taxpayers and $500,000 for married taxpayers filing jointly.
This deduction can be used before you retire, but it’s especially useful for retirees who are looking to downsize. If you’re seeking ways to add some extra cash to your accounts tax-free, your home sale profit might be the perfect way.
The benefit of utilizing home-related deductions
All of the above-mentioned tax deductions and tax breaks can be applicable if you are under age 65 or have not yet retired, but retirees potentially stand to benefit the most from them—especially when you’re living on a strict retirement budget. Tax deductions are all about saving you money come tax season, and writing off interest and property taxes can help reduce your tax burden.
However, don’t forget that after you turn 65, you’re entitled to a larger standard deduction on your taxes than what was previously available. Consider this before making the decision to itemize your deductions. Using the standard deduction may be more beneficial to you in the end.
If you’re searching for more ways to make tax deductions work for you in retirement, speak with a financial planner skilled in retirement planning.