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Five Often Overlooked Tax Deductions to Understand Before Retirement
Many U.S. taxpayers focus on filing accurately and on time, yet still miss deductions they may be eligible to claim. For adults planning for retirement, understanding commonly overlooked tax deductions can be especially important, as taxes may continue to affect cash flow both before and after leaving the workforce.
This article highlights several tax deductions that are frequently missed or misunderstood. The information is educational in nature and intended to provide general awareness, not tax advice. Tax rules can change, and individual circumstances vary, so consulting authoritative sources or qualified professionals may be appropriate.
Why Overlooked Tax Deductions Matter
Tax deductions reduce taxable income, which can influence how much tax is owed in a given year. While deductions do not eliminate taxes, they may help manage tax exposure over time. Overlooking them can lead to paying more than required under current tax law.
As retirement approaches, tax considerations may become more complex due to multiple income sources, such as pensions, Social Security benefits, required minimum distributions (RMDs), or taxable investment income. Awareness of overlooked tax deductions can support more informed financial planning.
Five Commonly Overlooked Tax Deductions
1. Reinvested Dividends and Cost Basis
When mutual funds distribute dividends or capital gains in taxable accounts, those amounts are generally subject to tax in the year they are received. Many investors choose to reinvest these distributions rather than take them in cash.
A common oversight occurs when selling mutual fund shares. If reinvested dividends are not included in the investment’s cost basis, the reported gain may be overstated, potentially leading to taxation on the same income more than once. Maintaining accurate records or reviewing brokerage statements can help reduce this risk.
Mutual funds are sold only by prospectus. Investors should carefully consider investment objectives, risks, charges, and expenses before investing.
2. Out-of-Pocket Charitable Expenses
Charitable deductions are not limited to cash contributions. Taxpayers may be able to deduct the value of donated goods, such as clothing or household items, as well as certain out-of-pocket expenses incurred while volunteering.
For example, mileage driven for charitable purposes may be deductible at the applicable IRS rate. Documentation is important, and receipts are generally required for charitable contributions over $250. Valuation rules and substantiation requirements apply, particularly for non-cash donations.
3. State and Local Tax Payments
Taxpayers who owed state or local income taxes when filing a prior-year return may be able to deduct those payments in the year they were paid, provided they itemize deductions.
It is important to note that federal law currently limits the state and local tax (SALT) deduction to a capped amount. For tax year 2026, the cap is $40,400. This limitation may affect whether itemizing deductions provides a tax benefit compared with taking the standard deduction.
4. Medicare Premiums and Medical Expenses
Medical expenses can represent a significant cost during retirement. The IRS allows certain unreimbursed medical and dental expenses to be deducted if they exceed 7.5% of adjusted gross income (AGI).
Eligible expenses may include Medicare Part B and Part D premiums, Medicare Advantage premiums, co-payments, deductibles, and other qualifying medical costs. Only expenses above the AGI threshold are deductible, and accurate recordkeeping is essential.
5. Income in Respect of a Decedent (IRD)
Individuals who inherit assets such as traditional IRAs or pension benefits may encounter a lesser-known deduction called income in respect of a decedent (IRD). This situation can arise when estate taxes were paid on income that had not yet been taxed.
In certain cases, beneficiaries may be able to deduct the portion of estate tax attributable to the inherited income when taking taxable distributions. The rules surrounding IRD can be complex and depend on how the estate was taxed.
Important Considerations and Risks
Tax deductions are subject to eligibility requirements, thresholds, and documentation standards. Claiming deductions incorrectly may increase the likelihood of errors or audits. Additionally, tax laws may change, affecting the availability or limits of deductions over time.
For retirement planning, taxes are just one of many factors to consider alongside income needs, investment risk, healthcare costs, and longevity. No single deduction or strategy applies universally.
Staying Informed
Understanding overlooked tax deductions can improve general tax awareness, but it does not replace professional guidance. Reviewing IRS publications and staying informed through credible sources can help taxpayers remain current on applicable rules.
Those approaching or living in retirement may benefit from periodic reviews of their tax situation to ensure filings reflect current laws and personal circumstances.
