Top 10 tax preparation tips

by the Editor, SeniorInsider | Jun 02, 2011

Whether seniors pay for their tax preparation or go the do-it-yourself route, there are many important tax issues which are easy to miss or to be unaware of. The following 10 tax tips include those that are the most easily missed and frequently encountered tax preparation issues. Because the current $5 million federal estate tax exclusion regarding gift tax is not applicable for the majority of seniors, gift tax was not included in tax preparation tax tips.

Tax Preparation Tip #1 & #2: Selling Your Home Tax Free and Capital Gains Planning


The top two tax preparation tips involve selling your home tax free, and capital gains tax planning. When selling your home, the basic rule under IRC Section 21 states that a homeowner can exclude gain from the sale of their principal residence, however, the home must have been both owned and used by the taxpayer for at least two years out of the five years preceding the sale. This tax exclusion is capped at $500,000 for married couples who file together and $250,000 for single people.

As far as capital gains go in your tax preparation, keep in mind that long-term capital gains are usually taxed at a flat rate of 15%, and that in 2010 there is no tax on capital gains for people who are in the tax bracket of $67,900 or less for couples and $33,950 for singles. For those of you who are contemplating retirement, delay that retirement for a year or more and live on the tax-free sales of capital assets, thus receiving a higher monthly benefit later.

Tax Preparation Tip #3 & #4: Standard Deduction of Seniors and Taxable Amount of SS Benefits


Tax preparation often comes with errors, especially when we try to complete our taxes ourselves without benefit of being entirely up to speed on all the new tax laws. If you don’t detail your deductions, you will get a larger standard deduction amount if you and/or your spouse are over 65, and an even larger deduction if one or both of you is blind. Good advice for seniors is to be very careful when calculating the taxable amount of your Social Security. Be sure and use the Social Security benefits worksheet, then double check it prior to transferring the information to your 1040 or 1040A.

Tax Preparation Tip #5: Credit for the Disabled and Elderly


If you file Form 1040 or 1040A, you may be entitled to secure the Credit for the Elderly or Disabled, which is based on your current age, filing status and yearly revenues. If you and/or your spouse are either 65 or older, or under 65 but permanently and totally disabled and your income on line 38 of Form 1040 is less than $20,000 and the non-taxable part of your SS or other nontaxable pensions is less than $5,000, then you are entitled to take this credit during tax preparation.

Tax Preparation Tip #6 & #7: College Funding and Roth IRA Conversion


Grandparents can set up a 529 plan for grandchildren, and, when used for college, the earnings are tax-free. While a gift like this is subject to gift tax, but you can accelerate five years of the gift into one year—in other words $65,000 can be gifted to a 529 account for one grandchild without using any of the $1million lifetime gift tax exemption.  As of January 1, 2010, Roth IRA conversions became easier, eliminating the $100,000 income limit and allowing tax paid on the conversion to be deferred. After a five-year period, all withdrawals by the owner of the Roth IRA, the surviving spouse or the spouse’s beneficiaries are completely tax free.

Tax Preparation Tip #8, #9 & #10 Tax Preparation: Final Thoughts


When you are in the middle of your tax preparation, make sure you have all necessary records and forms as well as senior assistance for filing your taxes: receipts, canceled checks, W-2’s, 1099’s and any other documents which support your income and deductions. If you are due a refund, consider direct deposit to get it deposited directly into your bank account much faster. Return to the IRS website over and over—you will be surprised how much great information you can find there.


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