It’s important for retirees to take advantage of all available tax breaks. This is particularly valid for people on fixed incomes. You have to make even cent of it last. However, holding onto your money in retirement is not always simple. It’s easy to miss out on substantial financial or tax savings opportunities. It’s crucial that you keep a careful eye on your tax situation. Learning about frequently disregarded retirement tax benefits may also be beneficial. And we’re going to teach you precisely that today.
Larger Standard Deduction After Age 65
As you get closer to retirement (age 65), your standard deduction actually increases, leading to more money in your pocket. For example, in 2023 the standard deduction was $13,850 for an individual taxpayer. For joint filers, it was $27,700. However, once you turn 65, it increases: $1,850 for single taxpayers, or $1,500 per spouse for a married couple filing jointly.
Larger HSA Limit Starting at Age 55
For individuals 55 years old or older, the maximum contribution to health savings accounts increases by $1,000. Retirees can save more for healthcare because of this change. Retirees now have the opportunity to save enough to cover healthcare costs, which often rise as they age. For instance, a retiree in the 24% tax bracket may 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 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. Retirees, thankfully, have a higher bar. The 2023 senior threshold was $14,700 for single filers, or $28,700 for joint filers (assuming both are 65 years of age or older). Before turning 65, the threshold is $12,950 or $25,900, respectively. Retirees may be able to avoid filing taxes altogether thanks to this higher threshold.
Catch-Up Contributions
Those 50 and up can finance their retirement accounts beyond the regular government restrictions by making “catch-up” payments. Maximizing these contributions may provide significant benefits. For example, the ceiling on 401(k) catch-up contributions was an additional $7,500 in 2023. Over time, this might lead to a significant rise in portfolio growth.
Elderly Credit
Certain taxpayers aged 65 or older may qualify for the elderly credit. This credit may lower their total tax liability by up to $7,500. To qualify for this benefit, single people without dependents must have a gross income of less than $17,500. If you file jointly as a married couple, meanwhile, and both spouses are over 65, your gross income is limited to $25,000.
IRA Deduction
Assuming you are over 50 and depending on your tax status and adjusted gross income, you may be eligible to increase your IRA deduction by an extra $1,000. This may allow a retiree in the 22% tax bracket to save an extra $220 on their tax liability, just as an example.
Qualified Charitable Distributions
Qualified charitable contributions are those made from an IRA that are made directly to a charity organization. Recipients can reduce their taxable income by taking these tax-free payouts. For example, a retiree in the 24% tax bracket may save up to $1,200 in taxes via a $5,000 charitable donation reducing their taxable income.
Taxes and Retirement: Explained in 5 Steps
Making use of tax breaks and other advantages to protect your money from higher taxes is an essential part of retirement planning. To ensure that you are adequately ready for retirement-related taxes, you must ask yourself:
How will your retirement income streams will be taxed? You may receive income in retirement from a variety of sources, such as Social Security, pensions, and payouts from your 401(k) or IRA. Do your research, and determine how each source of income is taxed. For example, you may have some taxation on your Social Security benefits based on your provisional income.
Be prepared for RMDs. After you turn 73, required minimum distributions (RMDs) may become an issue. Consider how these withdrawals will affect your taxable income.
Aim to stay within certain tax brackets. Spreading out withdrawals across a number of years is a potential strategy to lessen the effects of higher tax rates.
Create a tax-efficient withdrawal strategy. Utilize tax-free or tax-deferred accounts to provide additional income. Determine which accounts to take money out of first, and how much to take out at a time, in order to minimize the impact of taxes. Think about using investments that provide very little taxable income, like some types of index funds or municipal bonds.
Continuously review and adjust your plan. Any changes in tax laws may affect your retirement strategy, and adjustments may 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 with us and learn more about tax-free or tax-deferred retirement strategies, give us a call. Attend one of our events or call us directly to set up an appointment.
Source: Yahoo Finance