The importance of tax planning doesn’t diminish after you retire. In fact, it may be even more important than before you left the workforce. Once you retire, your income typically comes from three main sources: Social Security benefits, retirement accounts, and investments. Depending on your financial situation, tax planning can not only help reduce the amount of taxes you’ll owe but also make your retirement dollars last a little longer. Although everyone’s situation is unique, these five post-retirement tax tips can help anyone save a little green.
Pay Attention to Social Security Income Taxes
In general, you will not pay taxes on your Social Security benefits if it is your only source of income. Wages from a gig job, interest, dividends, or other retirement income, however, can impact your tax liability. Depending on your filing status and the amount of additional income that is not tax-exempt, you could be required to pay taxes on 50% or 85% of your Social Security benefits. A quick way to determine if you may owe is to take half of your Social Security income and add it to your taxable income. If it’s more than $25,000 (single filer), then a portion of your benefits may be taxable. To reduce your tax liability, make sure you stay below the given income threshold for your filing status.
Consider a Partial Roth IRA Conversion
Another way to reduce your tax liability is to convert your traditional IRA or employer-sponsored retirement account to a Roth IRA. There are several benefits for converting, including tax-free income and greater flexibility with distributions. Although pre-tax assets are subject to ordinary income tax rates in the year they are converted, you can minimize the impact by converting a portion of your assets over several years. Any unused tax deductions, such as medical expenses or charitable donations, can also help offset any taxable income as a result of the conversion.
Take Required Minimum Distributions (RMDs)
As of January 1, 2020, you are now required to take minimum distributions from your retirement accounts once you reach the age of 72. This includes tax-deferred accounts, such as 401(k)s, 403(b)s, and IRAs (except Roth IRAs). The amount you must withdraw depends on your life expectancy (as determined by the IRS) and the value of your retirement account. Each account’s RMD must be calculated separately. You can, however, combine all your RMDs and withdraw the total amount from just one or any combination of plans.
If you fail to take out the required amount, the tax penalty is equal to 50% of the amount you should have withdrawn. To avoid it, be sure to take out your RMDs before December 31. The only exception is if it’s your first year required to take a minimum distribution. You can delay withdrawals until April 1, but you’ll also need to take another before December 31 of the same year. This may bump you into a higher tax bracket, however, since distributions are counted as taxable income.
Utilize Tax Breaks For The Elderly
There are various tax deductions and credits that can also help you save on taxes and extend the life of your retirement nest egg. Here are just a few of the most commonly used:
- Standard deduction – If you’re 65 or older, you’ll get a little extra for the standard deduction. The amount depends on your filing status and the age of your spouse if you are filing jointly.
- Charitable contributions – Even if you don’t itemize, you can claim up to $300 in cash donations (single filers) or $600 (joint return).
- Child Tax Credit – Are you caring for your grandchild(ren)? If you provide more the 50% of their support you could be eligible to take the Child Tax Credit. For tax year 2021, the credit has increased from $2,000 per child to $3,000 (ages 6-17) and $3,600 (ages 5 and younger).
- Credit for Other Dependents – Valued at up to $500 per dependent, this credit may be used if you have dependents and don’t qualify for the Child Tax Credit.
- Tax Credit for the Elderly or Disabled – If you are 65 or older, or retired on permanent and total disability, you may be eligible for a tax credit valued between $3,750 and $7,500.
- Qualified Charitable Distribution (QCD) – Once you’re over the age of 70.5, you can directly transfer up to $100,000 from your IRA (excluding SIMPLE IRAs or SEP IRAs) to a qualified charity. This not only satisfies your RMD requirement but also reduces your taxable income.
Get Help From a Tax Advisor
Feeling a bit overwhelmed? We strongly encourage you to work with a tax professional. A tax advisor can help you avoid unexpected post-retirement taxes that could jeopardize your hard-earned nest egg. And since they are well-versed in the current tax code, they can identify tax credits and deductions that may reduce your tax liabilities. Don’t wait until your retirement funds run short. Call Tax Defense Network today and ask about our tax planning services.