In this month’s Q&A with Chris Orestis, aka “Retirement Genius,” Newsmax Finance Editor Lee Barney asks the expert about tax opportunities—and liabilities—specific to seniors.

When it comes to taxes American’s have two duties—pay their fair share and don’t pay a penny more than they truly owe! Knowing how taxes work for seniors is critical to make accurate financial decisions and limiting any negative consequences. No one can create a workable budget in their retirement if they fail to account for the impact of taxes.

For most people in their retirement years, every penny counts, but a huge number of those pennies can end up going to Uncle Sam. This is why it’s important for older Americans and their families to understand as much as they can about the tax opportunities and the tax liabilities people will need to navigate when they are seniors. Every dollar that a person keeps in their pocket is a dollar earned!

So, what should people know about taxes for seniors and people in retirement?

Newsmax Finance: Let’s start with the portion of retirement income that makes up the most, for the majority of people: Social Security. Can Social Security benefits be taxed?

Chris Orestis: Yes, absolutely. This is the first trap that retired seniors and near retirees need to know about. Depending on total income and filing status, people can owe taxes on as much as 50% to 85% of Social Security benefits. Any income earned up to $19,560 would not trigger Social Security taxation, but once you exceed this income level, be prepared for tax consequences against your benefits.

Newsmax Finance: Is it possible for seniors to deduct Medicare premiums from their taxes?

Orestis: Yes, absolutely. This is an opportunity for seniors. If a person is self-employed and not eligible to receive group coverage, premiums paid for Medicare Part B and D, Medigap or Medicare Advantage plans can be deductible.

Newsmax Finance: When it comes to investment income, are there tax advantages to being 65 or retired and making money on investments?

Orestis: Yes, herein lies another opportunity. After the age of 65,  many people will retire, and this will lower their income. In turn, this can lower their capital gains rate from 20% to 15%, or even 0%.

Newsmax Finance: What about long-term care insurance and expenses? Are these a tax opportunity or liability?

Orestis: Opportunity. Nursing home, home care, assisted living, and memory care expenses, as well as premiums for qualified long-term care insurance policies, are tax deductible. In addition, family caregivers may be eligible for tax deductions and credits based on money they have spent out-of-pocket providing care for a loved one.

Newsmax Finance: Here is another big one—retirement accounts. Are retirement accounts a tax opportunity, a tax trap, or both?

Orestis: They are both. Money contributed to retirement accounts like 401(k)s and individual retirement accounts (IRAs) grows tax deferred, but if people withdraw money from a retirement account too young, i.e. before the age 59-1/2, they will have to pay a 10% tax penalty on top of income taxes.

Also, if people don’t take their required minimum distribution (RMD) starting at age 72, they will pay a 50% tax penalty on any annual shortfall.

Newsmax Finance: Another big holding for retirees is their home. Many seniors decide to downsize and sell a large home to trade in for a smaller apartment or condo. Is the sale of a home or real estate a tax opportunity or a tax trap?

Orestis: Selling real estate can be both. A person who has lived in their home for at least two of the last five years prior to its sale will not pay taxes on gains of $250,000 as an individual or $500,000 as a married couple.

But, with home values soaring, many older sellers could still be facing a capital gain problem beyond these exempt levels. A couple of ways to reduce this capital gain problem is to deduct capital improvements done to the home (not to be confused with regular maintenance) or to do a 1031 exchange with the gains from the sale of an investment property into the purchase of a like property within 180 days.

Newsmax Finance: Volunteering, charitable work and charitable contributions is important for many seniors. How do tax deductions for charitable contributions work?

Orestis: Charitable contributions present yet another wonderful opportunity for seniors. Deductions for cash contributions can be taken for up to 60% of Adjusted Gross Income (AGI), and donations of property, such as a vehicle or property, can be deducted at the fair market value of the asset.

Newsmax Finance: Is gifting money to family members a tax opportunity or a tax trap?

Orestis: Gifting to family members can be both an opportunity and a trap. Individuals can gift money to family members on an annual basis tax free. As of 2022, the annual gifting limit is $16,000 to each family member, and a spouse can gift another $16,000.

But it’s important to understand that other gifts with value, such as money spent on a wedding, education, or to help with a down payment also count towards the annual gifting cap, and if you go over the amount, there will be tax implications.

Newsmax Finance: Can money from bank loans, home equity loans or a reverse mortgages be taxed?

Orestis: No, and because they are not, herein lies an opportunity for seniors. Because the funds received from a loan or a reverse mortgage are borrowed and not income, they are not subject to taxes.

Newsmax Finance: Is the sale of a life insurance policy by the owner with a life settlement a tax trap or opportunity?

Orestis: Opportunity- If the owner of a life insurance policy is diagnosed with chronic health conditions (i.e. a condition that affects two activities of daily living (ADLs) or more) or terminal conditions (giving them two years or less of life expectancy), the funds received from the sale, that is, the life settlement, of their policy can be exempt from Federal taxes. Also, any funds received at or below the premiums paid into the policy is exempt from taxation.

As you can see, knowledge is power, and when it comes to seniors and taxes, it’s also the way to make sure people are empowered to keep every penny they can to continue thriving throughout their retirement years.

But be sure to remember, taxes are complicated and to avoid costly mistakes people should always consult a tax professional to help them navigate the twists and turns of all the IRS rules, as well as point out the potential deductions that could be available to them depending on their age, health, and living situation.
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Chris Orestis is a nationally recognized senior care advocate and expert in retirement, long-term care and specialty senior living funding solutions. The author of two books, numerous published papers and articles, and a frequent industry speaker; he is the innovator that brought the LTC Life Settlement into the market over a decade ago.