6 Smart Ways You Can Lower Your Taxes as You Near Retirement

As you near retirement, you may find that you want to take extra steps to lower your tax burden and protect your wealth. During retirement, your income will likely fall significantly, so it makes sense for you to start saving more money now. Keeping your money out of Uncle Sam’s pocket is a good way to make sure you have the funds you need to enjoy retirement.

The best way to lower your tax burden will depend on your specific circumstances. What works well for one person may not help another as much. Generally, though, you can rely on these six smart ways that you can lower your taxes as you near retirement.

Itemize Your Deductions

Although it’s much easier to take a standard deduction, you’ll likely lower your tax burden by itemizing your deductions. For 2017, married taxpayers filing joint returns get a standard deduction of $12,700. If you’re single, then you get a standard deduction of just $6,350.

In many cases, people can get larger tax savings by itemizing their deductions. For the best result, have your CPA compare your itemized deduction with your standard deduction. Choosing the larger of the two will make your taxes cheaper.

Commit More Money to Your Retirement Accounts

As you near retirement, the IRS lets you invest more money in your retirement accounts. For instance, a person under 50 years old could contribute $5,500 to an IRA account in 2017. Assuming that you’re 50 or over, you could contribute up to $6,500.

A similar rule applies to other retirement accounts. In 2017, someone 50 or older could contribute $24,000 to a 401(k) while someone under 50 could only contribute $18,000. If you have a SIMPLE account, you could contribute $15,500 if you’re 50 or older. Those under 50 could only contribute $12,500.

By adding as much money as possible to your retirement accounts, you can often lower or postpone taxes on the money in those accounts.

Use Capital Loss Carryovers

The IRS will only let you deduct $3,000 in capital loss per year. Even if you lose more than $3,000 in a year, though, you can still use those losses to lower your tax burden over the next few years by using a capital loss carryover.

For example, if you had a $10,000 loss in 2017, you can deduct $3,000 for the 2017 filling year. When you file your 2018 return, you can deduct another $3,000. In 2019, you can deduct another $3,000. In 2020, you get to deduct $1,000.

Capital loss carryovers make it less risky for you to invest in stocks. Ideally, you’ll earn money from those investments. If you lose money, though, you can at least use the full loss to keep your tax burden as low as possible for the next several years. You can keep deducting your loss until you reach $0.

If you’d rather give your money to a charity instead of the government, then you should consider donating stocks to nonprofit organizations.

Donating stocks helps you in two ways. First, you get to avoid paying capital gains tax on the money that your stock earns. Second, you can deduct the fair market value of your stock as a donation.

When choosing how much to donate, remember that the IRS has limits on how much you can deduct. For 2017, you can deduct up to 20 percent of your adjusted gross income (AGI) when you donate capital gains assets.

Purchase a Whole Life Insurance Policy

Purchasing a whole life insurance policy won’t lower your tax burden this year. More often than not, your policy will never affect how much money you pay in taxes. It will, however, give your family an opportunity to receive tax-free benefits after you pass away.

Start Planning Your Long-Range Tax Bracket

The closer you get to retirement, the more important it becomes to start planning your long-range tax bracket so you can minimize your tax payments. Long-range planning isn’t something that you can do on your own, though. You’ll need help from a tax professional adept at using software and spreadsheets to determine how your income sources will influence your projected tax rates.

Once you have a good idea of what your future finances look like, you can lower your retirement taxes by creating a strategy that lets you withdraw money from your accounts without pushing you into a higher tax bracket. Remember that some of your retirement accounts get taxed when you withdraw money. This feature helps you invest more and see greater growth, but it can backfire when you take out too much money during one year of your retirement.

You may also want to rearrange your retirement savings and investments to reduce the taxes that you’ll pay when you access your funds. Rearranging investments can get quite complicated, so you’ll probably need help from a professional to maximize your tax savings.

Lowering your tax burden becomes increasingly important as you near retirement. When you don’t have a steady stream of income, you need to pay the government as little as possible. You want to enjoy your retirement years as much as possible. You can’t do that when you’re worried about money.

If you’d like to learn more about how you can achieve that, contact a Ross Wealth Advisor today!

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  1. Mike Miller on September 25, 2020 at 9:47 pm

    Useful information. Thanks for sharing it

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