6 Must-Know Tax Reduction Considerations
If you are at or near retirement age, financial security must be on your mind. Social Security benefits are generally too low to live on alone. Even with Medicare, you are likely to have significant medical expenses in your senior years. Living comfortably after age 65 is a challenge for many Americans.
Fortunately, you can take steps now to improve your bottom line, even if you are in your 50s and even 60s. Understanding current tax law can save you a significant amount of money by reducing your tax obligations.
Tax Reform and Standard Deductions
The tax reform bill doubled the standard deduction to $6,000 for single filers and $12,000 for married joint filers. In addition, the new law retains the additional deductions for those 65 or older – $1,300 for single filers and $2,600 for married couples. Those who are younger than 65 but blind can also claim this additional deduction.
Since the majority of United States taxpayers take the standard deduction, this change in the law may benefit you in the years leading up to your retirement. These individual tax breaks are slated to expire on December 31, 2025, which makes predicting your tax future difficult.
Social Security Taxes
Whether or not your Social Security income is taxable depends on several factors. To determine your liability, you need to add up all your taxable income and your tax-exempt interest. Then you need to add half of your yearly Social Security benefit. If you are single, head of the household, or a “qualifying widow or widower” and the sum is less than $25,000, you will not have to pay taxes on your Social Security. For married couples filing a joint return, the amount is $32,000. People who earn more than these amounts may be taxed on up to 85 percent of their Social Security.
Senior Tax Credit
Once you reach age 65, you may also be eligible for a special tax credit. The IRS uses your adjusted gross income to determine if you can claim this credit that helps many lower-income seniors. For instance, you cannot claim it if you are a single filer with an adjusted gross income of $17,500 or a joint filer with an AGI of $20,000. More restrictions apply, but your tax professional can explain how this credit can reduce your tax liability.
Roth IRA and 401(k)
The choice of IRAs makes a difference in your retirement tax payments. As you plan for retirement, you have to consider whether you want to pay taxes on your savings up front or when you cash it in. If you’d prefer not to pay taxes on your savings after retirement, you should choose a Roth IRA or 401(k). Taking the tax hit while you are younger can help you enjoy a more prosperous and stress-free life after age 65. If you are approaching retirement and are in a traditional IRA or 401(k), ask your tax professional to advise you on tax-reducing strategies.
If you itemize medical deductions, 2017 and 2018 offer you a window of increased benefits. 2016 taxes only allowed you to deduct unreimbursed medical expenses that were 10 percent of your adjusted gross income. For 2017 and 2018, the percentage has been lowered to 7.5% of the AGI. In 2019, the rate goes back to 10 percent, so this advantage will be fleeting. If you have experienced high out-of-pocket medical expenses this year, see if itemizing will lower your tax burden.
If you have invested in long-term-care insurance, you may be able to deduct at least part of your premiums if you itemize. The cost of nursing home care is so expensive that very few seniors can afford to pay for it out of pocket. The price of long-term-care can quickly eat through even a healthy retirement nest egg, often forcing nursing home residents to apply for Medicaid. Taking out a long-term care policy can protect your savings and your children’s inheritance.
Mortgage Interest and Property Taxes
If you plan to downsize in retirement, you will need to consider how the new tax code will affect your home mortgage and property taxes. Home mortgage interest will now only be deductible on loans of $750,000 or more, and home equity loan interest will not be deductible any longer. Also, deductions taken on state and local taxes are now limited to $10,000 each year. As a result, you may want to downsize early. The capital gains tax remains largely the same, so selling your larger home now may help you hang onto more of your property investment returns.
As you near retirement, you need to be fully informed about the new tax code and about ways to reduce your tax obligation. You will receive some tax advantages as a senior citizen, but you will also face some new challenges. Meet with your investment and tax professionals to map out a financial strategy for your later years. You can always make changes that can lead to a more comfortable retirement, even if you are past 50. Once you hit 65, you want to enjoy your new-found freedom and not fear your future.
If you’d like to learn more tax reduction considerations and how to implement, contact Ross Wealth Advisors today!