Retirees need to take full advantage of every available tax break they can. This is especially true if you’re living on a fixed income; you need that money to last, so every cent counts. However, holding on to your money during retirement is easier said than done. It’s easy to miss valuable tax-saving opportunities and other opportunities to save money for retirement. It’s important to pay close attention to your specific tax situation. Learning about oft-overlooked tax breaks for retirees could also help. And that’s exactly what we’re going to teach you about today. Interested in learning more? Keep reading.
Larger Standard Deduction After Age 65
Your standard deduction rises as you approach retirement age (65 years old), putting extra money in your pocket. For example, the standard deduction for an individual taxpayer in 2023 was $13,850. Joint filers, meanwhile, received $27,700. Once you reach age 65, however, your standard deduction increases by $1,850 for a single taxpayer, or $1,500 per spouse for married filers.
Larger HSA Limit After Age 55
The maximum contribution to health savings accounts increases by $1,000 for those 55 years old or older. Thanks to this modification, retirees can increase their potential healthcare savings. This increased HSA limit gives retirees the chance to save enough for healthcare bills, which frequently increase throughout retirement. As an example, the higher HSA cap may allow a retiree in the 24% tax bracket to save an additional $240 in taxes. This is a good example of how crucial healthcare funds are, particularly during retirement.
Higher Tax-Filing Threshold In Retirement
The tax-filing threshold is a minimum limit of gross income that an individual must reach before they have to file a tax return. This threshold is, thankfully, elevated for retirees. In 2023, the threshold for seniors aged 65 and up is $14,700 for single filers or $28,700 for joint filers, provided they’re both 65+. Prior to age 65, the threshold is only $12,950 or $25,900, respectively. This higher threshold may help some retirees avoid having to file a tax return at all!
Make Catch-Up Contributions
Catch-up contributions allow individuals aged 50 or older to contribute more than the typical limits to their retirement accounts. Maximizing these contributions could be significantly beneficial. As an example, the 401(k) catch-up contribution limit stands at an additional $7,500 in 2023. This could lead to significant extra portfolio growth in the long run.
Elderly Credit
Elderly credit is a tax benefit available to some taxpayers aged 65 or older. This credit can reduce their amount of tax owed by up to $7,500. Individuals without dependents must have a gross income below $17,500 to be eligible for this benefit. If you file jointly as a married couple, on the other hand (assuming both spouses are above 65), your gross income cannot exceed $25,000.
IRA Deduction
Depending on your filing status and adjusted gross income (and assuming you are 50 or older) you may be able to raise your IRA deduction by an additional $1,000. Because of this, a retiree in the 22% tax bracket might be able to reduce their tax liability by an additional $220.
Qualified Charitable Distributions
“Qualified charitable distributions” refer to distributions from an IRA paid directly to a charitable organization. These distributions can be done tax-free, reducing a retiree’s total taxable income. For example, a $5,000 distribution made by a retiree to a charity could potentially reduce their taxable income, allowing someone in the 24% tax bracket to save up to $1,200 in taxes.
Taxes and Retirement in 5 Steps
Utilizing tax breaks, among other ways of shielding your money against taxes, is a vital factor when planning for retirement. In order to properly prepare for taxes in retirement, you must:
Understand the tax implications of your retirement income streams. What will your different income sources be in retirement? These may include Social Security benefits, pensions, and IRA/401(k) withdrawals. Then, learn about how each income source will be taxed. For example, Social Security benefits may be partially taxable depending on your provisional income. Traditional IRAs/401(k)s are typically taxed as ordinary income.
Anticipate RMDs. After reaching age 73, you will be confronted with RMDs (required minimum distributions). Consider the effect that these withdrawals will have on your taxable income.
Aim to stay within certain tax brackets. Spreading withdrawals over multiple years may be an efficient way to help minimize the impact of higher tax rates.
Create a tax-efficient withdrawal strategy. To provide flexibility, utilize multiple tax-deferred and/or tax-free accounts. Then, assess which accounts to draw from first and how much to withdraw in order to minimize tax implications. Consider utilizing investments that generate minimal taxable income, such as municipal bonds or certain types of index funds.
Continuously review and adjust your plan. Any changes in tax laws may affect your retirement strategy, and adjustments might be necessary over the years as they change. Additionally, your financial situation and retirement goals may change with time. Periodically review your retirement strategy in order to ensure it still aligns with your situation.
If you’d like to discuss your retirement goals and learn more about tax-free or tax-deferred retirement strategies, we recommend reaching out to us. Attend one of our seminar events or call us directly to set an appointment. However, you should consult a qualified tax professional with specific tax questions.
Source: Yahoo Finance
