Retirees must make the most of all the tax breaks that they can. This is especially true for those living on fixed incomes. Every penny matters, you have to make it last. But it’s not always easy to hang onto your money in retirement. It’s not hard to overlook significant tax savings chances, or financial savings opportunities. It’s critical to closely monitor your tax position. Finding out about oft-overlooked tax breaks for retirees could also help. And that’s exactly what we’re going to teach you about today.
Larger Standard Deduction After Age 65
Your standard deduction actually rises as you approach retirement (age 65), putting extra money in your pocket. For instance, the standard deduction for an individual taxpayer in 2023 was $13,850. In contrast, joint filers received $27,700. Once you reach age 65, however, your standard deduction rises by $1,850 for a single taxpayer or $1,500 (per spouse) for married filers.
Larger HSA Limit Starting at Age 55
The maximum contribution to health savings accounts rises by $1,000 for those 55 years of age or older. Thanks to this modification, retirees can increase their healthcare savings. The increased HSA limit gives retirees the chance to save enough for healthcare bills, which frequently increase throughout retirement. For example, the higher HSA cap may allow a retiree in the 24% tax bracket to save an additional $240 in taxes. This is a perfect example of how crucial healthcare funds are, particularly during retirement.
Higher Tax-Filing Threshold
The tax-filing threshold is a minimum limit of gross income that an individual must reach before they have to file a tax return. Thankfully, retirees have a higher threshold. The threshold for seniors 65 years of age and over for 2023 was $14,700 for single filers, or $28,700 for joint filers, assuming both are 65 or older. The cutoff is $12,950 and $25,900, respectively, before reaching age 65. This increased threshold may make it possible for retirees to not have to file taxes at all.
Catch-Up Contributions
With catch-up contributions, those 50 and older can fund their retirement accounts above the standard government-imposed restrictions. Making the most of these contributions could have major advantages. The 401(k) catch-up contribution cap, for example, increased by an extra $7,500 in 2023. In the long term, this might result in a sizable increase in portfolio growth.
Elderly Credit
Elderly credit is a tax benefit available to some taxpayers aged 65+. 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 in order to be eligible for this benefit. If you file jointly as a married couple, meanwhile, and 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’re over 50, 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
donations made directly to a charitable organization from an IRA are referred to as qualified charitable donations. A retiree’s taxable income can be decreased, by taking these distributions tax-free. For instance, a retiree’s $5,000 charitable donation may lower their taxable income and result in a tax savings of up to $1,200, for a taxpayer in the 24% tax bracket.
Taxes and Retirement: Explained in 5 Steps
Utilizing tax breaks and various other ways of shielding your money against taxes is a crucial step when planning for retirement. In order to properly prepare for taxes in retirement, you need to:
Understand the tax implications of your retirement income streams. Ascertain the various sources of your retirement income, including Social Security, pensions, and distributions from your IRA or 401(k) accounts. Next, study how each source of income is taxed. For example, depending on your provisional income, your Social Security benefits may be partially taxed. Ordinary income is normally taxed on traditional IRAs and 401(k)s.
Anticipate RMDs. You will be faced with required minimum distributions (RMDs) after turning 73. Remember to 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 a way to help minimize the impact of higher tax rates.
Create a tax-efficient withdrawal strategy. Make use of tax-deferred and/or tax-free accounts to provide more flexibility. Then, assess which accounts to draw from first, and how much to withdraw to minimize tax implications. Consider utilizing investments that generate minimal taxable income, such as municipal bonds or some types of index funds.
Continuously review and adjust your plan. Any changes in tax laws have the possibility of affecting your retirement strategy. Adjustments might be necessary over the years as they change. Furthermore, your financial situation and retirement goals may change with time. Periodically review your retirement strategy 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, contact us. Attend one of our events or call us directly to set an appointment. However, you should consult a qualified tax professional with tax questions.
Source: Yahoo Finance
