There are many perks to getting older. Getting wiser. Getting more focused on what really matters. Getting grateful for family, friends, and loved ones. But, one thing that always puts a spring in your step is capitalizing on tax benefits.
As your birthday may be coming up soon, it’s time to look for—and enjoy the rewards of hitting 65—and beyond.
One of the best strategies for saving taxes on retirement income is based in where you live. The choice is yours to live in or move to a tax friendly state.
Investopedia offers insights into tax strategies for your retirement income. Seven states have no income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In 2021, Tennessee will join the group.
States can’t tax residents on retirement benefits earned in another state. That means that if you earn a pension in New York and relocate to Florida or Texas, this income would not be subject to state taxes.
Some states have special breaks for retirement income and or low-income taxes. These are important considerations for looking at maximizing your income in later years.
If your situation affords the possibility, consider deferring benefits until age 70. You’ll earn additional credits to boost your monthly benefits at that time. Plus you won’t have to pay taxes now on the benefits.
You might want to change your investment holdings in retirement. Look for moves that help you preserve principal and save on taxes.
Interest from municipal bonds is free from federal income tax. However the interest may affect the tax on Social Security benefits.
If you receive stock dividends, they are taxed at more favorable rates than ordinary income. This varies depending on your taxable income and may be 0, 15%, or 20%.
Use losses to offset capital gains. You may be able to reduce or eliminate taxes on the gains. Check in with your financial advisor or tax consultant to use losses to offset gains, and possibly carry these forward.
If you take a standard deduction, you’ll be able to deduct more after 65. The standard deduction amount is higher for people over 65 or blind. It is also higher if you’re unmarried, and not a surviving spouse.
Contributions to a 401(k) are limited to a set amount per year. For 50 and older, you can put in $26,000 per year. But this assumes that you’re still working, and your employer participates in a 401(k) plan.
If this doesn’t apply to you, you may be able to contribute an extra $1,000 per year to a traditional IRA or Roth IRA. Check with your accountant to see what will work for your personal situation.
If you itemize, you may be able to deduct unreimbursed medical expenses. However, this applies only to the amount in excess of 7.5% of your adjusted gross income.
Also, if you’ve recently purchased long-term care insurance, you may be able to add to the premiums in 2020. The older you are, the more you can deduct from your taxes in retirement. Check with your accountant to explore options.
If you’ve been dreaming of downsizing and selling your long-time home, there are tax benefits. The IRS lets you exclude from your income up to $250,000 of capital gains on the sale of your home. If you’re single. If you’re married, the exclusion rises to $500,000.
There are a number of conditions to qualify for this tax benefit such as:
Be sure to consult your tax attorney for details regarding your unique situation.
Many seniors and retirees are running their own businesses or starting new ventures. Business income and necessary reasonable expenses to do your business may be deductible. You may want to talk with your tax advisor or consult Nolo’s site for more insights into Business Tax & Deductions.
The big idea: Take advantage of tax benefits as you get older.
With a diligent approach, you can stay on top of choices, decisions, and strategic moves. Be sure to talk with your financial advisor and tax accountant. These professionals may be able to offer insights that give you benefits you may have overlooked.