Retirees should take advantage of all available tax breaks. This is especially the case if you’re living on a fixed income; every penny counts, because you rely solely on it to make ends meet. However, it isn’t always easy to maintain your retirement savings. It’s easy to ignore significant tax breaks and other opportunities to increase retirement savings. It’s vital to closely assess your specific tax situation. Learning about often-overlooked retiree tax benefits might also be advantageous. And today, that’s what we’re going to teach you all about. Curious to learn more? Keep reading.
Bigger Standard Deduction Starting Age 65
As you approach retirement age (65), your standard deduction grows, putting more money in your pocket. For example, in 2023, the standard deduction for individual taxpayers was $13,850. For joint filers, it was $27,700. However, once you reach the age of 65, your standard deduction increases by $1,850 for single taxpayers and $1,500 for married couples.
Higher HSA Limit Starting Age 55
The maximum contribution to health savings accounts for people 55 and older has been increased by $1,000. This adjustment has the potential to increase retirees’ future healthcare savings. For example, a retiree in the 24% tax rate may be able to save an additional $240 in taxes due to the raised HSA level. This is a great example of how crucial healthcare funds are, particularly in retirement.
Higher Tax-Filing Threshold
Your tax-filing threshold is your minimum gross income required to have to file a tax return. Fortunately for retirees, this level has been raised. In 2023, the threshold for single filers 65 years old or older was $14,700, or $28,700 for joint filers (both 65 and older). Before reaching the age of 65, the threshold is only $12,950 or $25,900. For some retirees, this higher threshold may mean not having to file a tax return at all.
Catch-Up Contributions Starting Age 50
Catch-up contributions allow people 50 and older to finance their retirement accounts beyond the regular limits. Making the most of these contributions could provide significant benefits. For example, in 2023, the maximum permitted 401(k) catch-up contribution amount was increased to $7,500. In the long run, this may result in a significant rise in portfolio growth.
Elderly Credit
Certain taxpayers aged 65 and older may be eligible for the elderly credit. This credit has the potential to reduce their overall tax payment by up to $7,500. Single people without dependents must have a gross income of less than $17,500. However, if you file jointly as a married couple and are both over the age of 65, your total gross income is instead limited to $25,000.
IRA Deduction
Depending on your filing status, adjusted gross income, and age (if you’re 50 or over), you may be able to raise your IRA deduction by $1,000. This might help a retiree in the 22% tax bracket to save an additional $220 on their tax bill.
Qualified Charitable Distributions
contributions made directly to a nonprofit organization from an IRA are known as “qualified charitable distributions.” Taking these tax-free dividends can reduce a retiree’s total taxable income. For example, a $5,000 charitable donation may reduce their taxable income, resulting in saving up to $1,200 on taxes for someone in the 24% tax bracket.
Taxes and Retirement in 5 Steps
One of the most important components of planning for retirement is to take advantage of tax breaks, as well as other tax-saving methods. To ensure you’re prepared for retirement income taxes, you must:
Recognize how your retirement income sources will be taxed. What sources of income will you have when you retire? Pensions, Social Security income, or IRA and 401(k) income are all possible options. Next, learn about the tax implications for each type. For example, depending on your provisional income, your Social Security benefits may be subject to partial taxation. Traditional IRAs and 401(k)s are typically taxed at ordinary income rates.
Be ready for RMDs. After the age of 73, you will be subject to RMDs. Consider how these withdrawals will influence your total taxable income.
Try to limit yourself to a single tax bracket. Taking withdrawals across a number of years could be an effective way to mitigate the impact of higher tax rates.
Create a withdrawal strategy that minimizes taxes. Use multiple tax-deferred and/or tax-free accounts to provide flexibility. Next, decide which accounts to withdraw funds from first and how much to withdraw in order to minimize the impact on your taxes. Consider investing in index funds or municipal bonds, which generate the least amount of taxable income.
Regularly review and adjust your strategy. Changes in tax rules may have an influence on your retirement strategy, and you may need to make modifications over time. Furthermore, your retirement goals and financial situation may change over time. Regularly assess your retirement strategy to ensure that it still fits your circumstances.
We recommend contacting us if you’d like to discuss your retirement goals and learn more about tax-free or tax-deferred retirement options. Attend one of our seminars or call us to schedule an appointment. However, if you have any specific tax-related questions, you should contact a competent tax professional.
Source: Yahoo Finance
