It’s important for retirees to utilize all of the tax breaks that are available to them. This is particularly true if you’re living on a fixed income; every penny matters, since you entirely depend on it to get by. It’s not always easy to hang onto your money in retirement, though. You can easily overlook important tax breaks and other chances to build retirement savings. It’s critical to closely examine your unique tax circumstances. Finding out about often-disregarded retirement tax breaks may also be beneficial. And today, we’re going to educate you all about that. Curious to know more? Keep reading.
Larger Standard Deduction After Age 65
As you get closer to retirement age (65 years old), your standard deduction increases, giving you more money in your pocket. For instance, in 2023 the standard deduction was $13,850 for individual taxpayers. In contrast, joint filers were given $27,700. However, your standard deduction rises by $1,850 for single taxpayers and $1,500 for married filers per spouse once you turn 65.
Larger HSA Limit After Age 55
For individuals 55 years of age or older, the maximum contribution to health savings accounts increases by $1,000. Retirees can enhance their prospective healthcare savings as a result of this change. For example, a retiree in the 24% tax bracket could be able to save an extra $240 in taxes because of the increased HSA threshold. This is an excellent illustration of how important healthcare finances are, especially in retirement.
Higher Tax-Filing Threshold In Retirement
The tax-filing threshold is the minimum amount of gross income that a person must reach in order to need to file a tax return. For retirees, thankfully, this level is raised. The threshold for single filers 65 years old or over in 2023 was $14,700–or $28,700 for joint filers, if both are 65 or older. The threshold is merely $12,950 or $25,900, respectively, before age 65. For some retirees, this higher threshold might mean they never have to submit a tax return at all!
Make Catch-Up Contributions
With catch-up contributions, those 50 years of age or older can fund their retirement accounts beyond the standard restrictions. Making the most of these contributions could have major advantages. For example, in 2023 the maximum allowable 401(k) catch-up contribution was set at an extra $7,500. In the long term, this might result in a sizable increase in portfolio growth.
Elderly Credit
Certain taxpayers who are age 65 or older may be eligible for the elderly credit. Their total tax liability may be lowered by up to $7,500 thanks to this credit. To qualify, single people without dependents must have a gross income of less than $17,500. However, if you file jointly as a married couple and both of you are over 65, your combined gross income cannot be more than $25,000.
IRA Deduction
Based on your filing status, adjusted gross income, and age (if you are 50 or older), you might be eligible to increase your IRA deduction by $1,000. This may allow a retiree in the 22% tax bracket to save an extra $220 on their tax liability.
Qualified Charitable Distributions
Distributions made directly to a nonprofit organization from an IRA are referred to as “qualified charitable distributions.” Taking these tax-free distributions can decrease a retiree’s overall taxable income. 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 someone in the 24% tax bracket.
Taxes and Retirement in 5 Steps
Making use of tax benefits is one of the most important aspects of retirement planning, along with other strategies to protect your money from taxation. To ensure you are adequately ready for retirement income taxes, you need to:
Recognize how your retirement income streams will be taxed. When you retire, what will be your various sources of income? These could include pensions, Social Security income, and distributions from IRAs and 401(k)s. Next, find out the tax implications for each source of income. 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.
Be prepared for RMDs. After you become 73, you will have to deal with RMDs (required minimum distributions). Think about how these withdrawals will affect your overall taxable income.
Try to limit yourself to a specific tax bracket. Taking withdrawals over a number of years could be a good method of reducing the effect of higher tax rates.
Formulate a withdrawal plan that minimizes taxes. Use numerous tax-deferred and/or tax-free accounts to offer flexibility. Next, determine which accounts to take money out of first and how much to take out to minimize the impact on your taxes. Think about using investments that provide the least amount of taxable income, like index funds or municipal bonds.
Review and tweak your plan often. Your retirement plan may be impacted by any changes in tax rules, and you may need to make adjustments as time goes on. Furthermore, your retirement objectives and financial status could alter over time. Make sure your retirement plan still fits your circumstances by reviewing it on a regular basis.
We suggest getting in touch with us if you’d like to discuss your retirement objectives and learn more about tax-free or tax-deferred retirement plans. Attend one of our seminars, or give us a call to schedule a time. If you have any specific tax-related questions, you should speak with a licensed tax expert.
Source: Yahoo Finance
