Two Important Breaks for Mature Taxpayers to Consider

If you're an "experienced" taxpayer, you're probably entitled to some age-based federal income tax breaks that younger taxpayers can't claim. Here are some details to help you take advantage of two valuable opportunities to lower your federal income tax obligations.

1. Make Retirement Account Catch-Up Contributions

If you're age 50 or older, you can make extra "catch-up" contributions each year to certain types of tax-favored retirement accounts. These extra contributions can make a significant difference in your retirement-age wealth.

IRA catch-up contributions. Once you've reached age 50, you can make extra catch-up contributions to your traditional IRA or Roth IRA. For 2024, the maximum catch-up contribution to these accounts is $1,000. You have until April 15, 2025, to make a catch-up contribution for the 2024 tax year, if you'll be 50 or older as of December 31, 2024.

Contributions to deductible IRAs create current tax savings, but your income may be too high to qualify. Contributions to Roth IRAs don't generate any up-front tax savings, but you can take tax-free withdrawals after age 59½ (assuming you've had at least one Roth account open for over five years). However, there are income restrictions on Roth contributions, too. Worst case, you can make extra nondeductible traditional IRA contributions and benefit from the account's tax-deferred earnings advantage.

Catch-up contributions to IRAs can add up. For example, Tom is currently 50. If he contributes an extra $1,000 to his IRA each year through age 65, he could have an extra nest egg worth $22,000, assuming a 4% annual return (rounded to the nearest $1,000). He would accumulate an extra $30,000, assuming an 8% annual return.  

Important: Making larger deductible contributions to a traditional IRA can lower your current income tax bills. Making additional Roth IRA contributions won't, but you'll be able to take more tax-free withdrawals later in life.

Company plan catch-up contributions. If your company's retirement plan allows it, you can also make extra salary-reduction contributions of up to $7,500 to your 401(k), 403(b) or 457(b) account for 2024. Salary-reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction for making them. If your state has a personal income tax, you'll generally get a state tax deduction, too. You can use the resulting tax savings to help pay for part of your catch-up contribution, or you can set them aside in a taxable retirement savings account to further increase your retirement-age wealth.

Here's an example to show how making catch-up contributions to your company's plan can add up. Jerry is currently 50. If he contributes an extra $7,500 to his company's 401(k) plan each year through age 65, he could have an extra nest egg worth $164,000, assuming a 4% annual return (rounded to the nearest $1,000). He would accumulate an extra $227,000, assuming an 8% annual return. Plus, his extra contributions to the company plan would lower his income tax bills in the years the contributions were made.

2. Claim Your Rightful Medical Expense Deductions   

Some taxpayers may automatically claim the standard deduction, instead of itemizing. That's because the current standard deduction amounts are quite generous, especially for seniors. For 2024, the standard deductions are as follows:

But failing to itemize if you qualify can be costly. Older taxpayers tend to have less mortgage interest expense and lower state and local tax bills that can be itemized than younger taxpayers. However, one itemizable outlay that can add up as you age is medical expenses.

Unfortunately, you can deduct medical expenses only to the extent they exceed 7.5% of your adjusted gross income (AGI). AGI includes all taxable income items and certain write-offs, such as deductible IRA contributions.

Will you have enough medical expenses in 2024 to itemize? Clearing the AGI hurdle may seem daunting at first. Of course, you're allowed to deduct out-of-pocket medical expenses, such as insurance co-payments, deductibles, and dental and vision care costs. In addition, seniors can deduct Medicare insurance premiums if they itemize.

The following Medicare insurance premiums qualify for purposes of claiming itemized medical expense deductions:

Medicare Part A (hospital insurance coverage). Most individuals are automatically covered for Part A without paying any premiums. (The premiums are considered paid from Medicare taxes on wages while you or your spouse were working.) However, if you didn't pay Medicare taxes, you may have to pay premiums to get Part A coverage. 

Medicare Part B (medical insurance coverage). Part B coverage, often called "original" Medicare, mainly covers doctors' visits and outpatient services. Most people must pay monthly premiums for this coverage. For 2024, the base Part B monthly premium is $174.70 ($2,096 per covered person for the year). Higher-income individuals pay more after a sliding-scale surcharge, up to a monthly maximum of $594 for 2024 (up to $7,128 per covered person for the year). Part B premiums are usually withheld from your Social Security benefits. If so, the amount withheld for last year will show up on your 2024 Form SSA-1099, "Social Security Benefit Statement," which you'll receive early next year. 

Medicare Part C (private Medicare Advantage health plan coverage). This is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don't need Medigap coverage (below).     

Medigap Insurance. This is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

Medicare Part D (private prescription drug coverage). Part D premiums vary depending on the plan. Higher-income people must pay a surcharge in addition to the basic premiums. For 2024, the surcharge can be up to $81 per month (up to $972 per covered person for the year). Surcharges are withheld from your Social Security benefits and will show up on your 2024 Form SSA-1099, which you'll receive early next year.    

You can also count premiums for qualified long-term care (LTC) insurance for purposes of claiming itemized medical expense deductions. For each covered person, count the lesser of premiums paid in 2024 or the applicable age-based limit. For 2024, the age-based limits are as follows:

If your medical expenses exceed the 7.5%-of-AGI threshold, it's time to consider other categories of itemizable expenses that you might incur this year. Common examples include:

• Qualified residence mortgage interest on a first or second home,
• Up to $10,000 for state and local income and property taxes (or up to $10,000 for state and local general sales taxes if you to choose to claim them instead of state and local income taxes), and
• Charitable donations.

Add all your itemizable expenses to your medical expenses for 2024. If the total is greater than your standard deduction, you can itemize rather than claim the standard deduction this year, and lower your tax bill accordingly.

For More Information

To recap, mature taxpayers may be able to significantly reduce their tax bills by making deductible catch-up contributions to traditional IRAs or company plans. Some also may be eligible to claim itemized deductions for their medical expenses. Contact your SSB tax advisor for help in getting the best tax results in your situation.  

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