9 Retirement Tax Tips – Pay Uncle Sam Less During Tax Season

Last Updated: February 27, 2024

Many believe they will owe less in taxes after they enter retirement, but that is often not the case, especially as they get older. Learn tax savings tips that can save you money.

Introduction

Ahhh…tax season. The smell of burnt up dollars waft through the air. Ain’t it glorious?

Not so much!

While the Spring season and the renewal of nature can be glorious, the thought of dealing with taxes is something many people dread.

Let’s face it, while taxes “can” be used to provide services we all need and benefit from, we all know many are wasted at the Federal, State and local levels. As such, paying taxes does often feel like burning up your hard-earned dollars in a dumpster fire.

Moreover, even if you believe you will be due money from the government this year in the form of a refund, few enjoy dealing with taxes, either on their own or through a preparer.

And if you think you will owe…Yikes. Spring can be quite unpleasant in that scenario.

This can be especially true for retirees who no longer draw paychecks from an employer and live on fixed budgets. Even more so as they come to realize that income tax can potentially become even more of a burden as they get older versus diminishing, as many retirees incorrectly believe.

Well, the good news is the fact that there are things you can do which can help reduce the income tax you might owe Uncle Sam. Effectively leaving more dollars in your wallet.

Today we look at a number of items that might help you save this tax season and/or going forward.

Additional standard deduction

As you are probably aware, you are generally eligible for tax deductions each year. The deduction is subtracted from your adjusted gross income (AGI) to calculate your taxable income and determine how much tax you owe for the tax year.

For some, itemizing deductions makes sense if that amount adds up to more than the standard deduction.

According to the Internal Revenue Service (IRS), itemized deductions can include things like certain state and local taxes (ex. – sales and property), medical and dental expenses, investment interest, mortgage related expenses, charitable donations, tax prep fees, casualty/disaster/theft losses, and more.

The standard deduction is what many people elect. According to the IRS, the standard deduction for the 2023 and 2024 tax years are:

• Single or married filing separate: 2023 – $13,850 | 2024 – $14,600
• Married filing jointly: 2023 – $27,700 | 2024 – $29,200
• Head of household – 2023 – $20,800 | 2024 – $21,900

If you are age 65 or older in the 2023 tax year you get an additional standard deduction on top of your normal standard deduction, as long as you choose the standard deduction when filing.

According to the IRS, the additional standard deduction for those age 65 and older (or blind) is:

• Single or head of household: 2023 – $1,850 | 2024 – $1,950
• Married: 2023 – $1,500 | 2024 – $1,550 (per qualifying spouse, filing jointly or separately)

Note: If you and/or your spouse are 65 or older and blind, the additional standard deduction is increased.

Medicare premium tax deductions

If you paid for Medicare in the 2023 tax year you might be eligible for a tax deduction if two criterial are met.

First, in order to claim the deduction you must itemize deductions when filing your taxes (versus electing the standard deduction), according to the Centers for Medicare & Medicaid Services (CMS). If so you will want to claim all eligible medical, dental and health-related expenses during the year. This does include the premiums paid for Medicare parts A, B, D, Medicare Advantage and Medigap.

Second, your eligible medical expenses must equate in total to more than 7.5-percent of your AGI. The total amount more than that figure can then be deducted via the itemized deduction method.

Keep in mind that as part of your medical deductions you can also deduct a portion of the long-term care (LTC) insurance premiums you pay during that year, based on your age, according to the IRS:

• 51 to 60: 2023 – $1,790 | 2024 – $1,760
• 61 to 70: 2023 – $4,770 | 2024 – $4,710
• 71 and older: 2023 – $5,960 | 2024 – $5,880

Spousal contribution even after retired

Normally you must have received income to qualify for an IRA contribution, but if you or your spouse retired, that individual may still be eligible for a contribution to their account for the tax year.

To be eligible the working spouse may make a contribution for the retired spouse into that person’s individual account, up to the maximum allowed for that tax year.

According to the IRS, the couple must file jointly to be eligible and the spousal contribution limit maximum is the same as any  IRA contribution limit for the year, which is listed below.

Importantly, the working spouse must have received income (compensation) covering their own IRA contribution, as well as that paid into the spouse’s IRA account.

For example, if the couple made IRA contributions of $15,000 for the tax year, the working spouse must have received at least $15k in eligible income (compensation) that tax year.

Maximum contributions for each individual (including retired spouse):

2023 – $6,500 | 2024 – $7,500

2023 – $7,000 | 2024 – $8,000 (if age 50 and over)

The combined maximum is up to $13,000 for 2023 (or $14,000 if both are over age 50), and $15,000 for 2024 (or $16,000 if both are over age 50).

Roth IRA conversion

You’ve probably heard about Roth IRAs and may have even opened such a retirement vehicle in the past. While they’ve been around some time, there’s often confusion surrounding them.

While there are many areas of confusion regarding Roth IRAs, one of the biggest is that of contributions versus conversions.

According to the IRS, Roth IRA contribution limits are actually the same as Traditional IRA contributions for a tax year. Those contributions are made on an “after-tax” basis – income where the taxes have already been paid to the government are used to fund the account.

When it comes to a Roth IRA conversion, the funds from a qualified plan, such as an IRA or qualified employer plan (e.g., 401(K) plan), are transferred into the Roth IRA. There is no limit to the conversion amount. (Caution, this can bump you up into a higher tax bracket and incur higher taxes owed)

That is a taxable event given it is a distribution from a qualified account. As such taxes would be owed on the distribution amount in the tax year of the conversion. This will increase your tax burden for that year.

But the potential benefit is the fact the Roth IRA will grow “tax free” (principal and interest) versus “tax deferred” going forward. You won’t owe taxes when withdrawals are taken from that account in the future. This effectively lowers your overall future tax obligation.

Additionally, there is the added benefit that Roth IRAs are not subject to required minimum distribution (RMD) rules, so the conversion effectively reduces your future annual RMD obligation.

This can be a good strategy if you believe that in the future – especially when RMDs are required based on your age (age 72, unless you turn 73 in 2023 or after, and at age 75 starting in 2033) – you will end up in a higher tax bracket because of increased income due to the RMD obligation, which will effectively increase the amount of tax you must pay.

Pay attention to your tax bracket

Speaking of tax brackets, they are a big deal and you should definitely pay attention to them in retirement.

Simply stated, your tax bracket is determined by your taxable income, which is your AGI minus deductions. The higher your taxable income, the higher your tax bracket and more taxes your owe on a marginal basis. In other words, you are taxed progressively more (your average tax increases) as your taxable income increases.

For example, if your tax status is single and your taxable income for 2023 is $65,000, the first $11k of income would be taxed at 10-percent. The amount from $11,001 up to $44,725 would be taxed at the slightly higher rate of 12-percent. The amount from $44,726 up to $65,000 would be taxed at the significantly higher rate of 22-percent.

(IRS Tax Rates – 2023 for single tax payer: Courtesy IRS)

What this translates to is the following for an individual filing as a single filer with $65,000 in taxable income:

• First $11,000 of income is taxed at 10-percent: $1,100 owed
• Next $33,724 of income ($44,725 – $11,001) is taxed at 12-percent: $4,046.88 owed
• Next $20,274 of income ($65,000 – $44,726) is taxed at 22-percent: $4,460.28 owed

This individual’s income tax owed for the year would be $9,607.16.

So, the question becomes what you can do if you find yourself spiking up into a higher bracket when retired. The good news is you do have some options to keep you from bumping up tax brackets and owing more taxes. Here are a few:

• If eligible, make a larger contribution to a qualified account, such as an IRA or your employer-sponsored 401(K) plan
• If you itemize your deductions and have medical or dental procedures you know are upcoming, you might want to get them done in the current year, which can effectively reduce your taxable income for the year
• Time your eligible income or business expenses so they are incurred before year-end and your taxable income this year is reduced
• Hold off on selling assets (e.g., stock, house) where you have gains until after the end of the year to avoid increasing your income for the year. Or sell a dog you’ve been holding onto that has lost value before the end of the year to reduce your income in this tax year

You definitely want to talk with your financial advisor in advance regarding any of these actions to ensure you have a full picture in terms of options and to be certain you don’t encounter unintended consequences.

One last note – increased income in retirement can lead to increased costs or diminished eligibility for some government programs and benefits. An example is Medicare, where increased taxable income can result in increased premiums.

Time your asset sales

We mentioned selling assets (stocks, businesses, real estate or other investments) earlier and this can be a big issue depending on the value of the asset being sold.

According to the IRS, If you purchase and then sell an asset at a profit within a year, that transaction is categorized and treated as a short-term capital gain. That gain is treated as ordinary income and can be taxed as high as 37-percent in 2024, depending on your level of income for the year.

If the same asset is held for more than a year (even by just one day), the profit is treated as a long-term capital gain and taxed at a rate of 0, 15- or 20-percent, depending on your level of income for the year.

Charitable donations

If you are a person who believes in charitable causes and giving, you might be able to save on your taxes while doing so.

Whether it’s giving to a cause you believe in, contributions you make weekly at your house of worship, donating clothing, furniture or other items of value to charitable organizations, and more, these actions can potentially save you when it comes to your taxes.

In order to take advantage of potential tax savings from your charitable giving (to eligible non-profit organizations) you do have to itemize your deductions versus electing the standard deduction. But if you do engage in a fair amount of charitable giving each year it probably makes sense to do so.

For 2023 and 2024 the limit for cash contributions is capped at 60-percent of your AGI (30-percent for non-cash assets), according to the IRS.

If you happen to be age 70.5 or older and have a sizable IRA, you can also take advantage of a Qualified Charitable Distribution (QCD).  According to the IRS you can distribute up to $100,000 in 2023 and $105,000 in 2024 to a qualified charitable organization.

There’s the added benefit that this can be used to satisfy your RMD for the year, and given that it reduces your IRA balance in total, it reduces your RMD in future years.

Gifting

When it comes to gifting money or other assets to people or entities that are not considered non-profit charitable organizations, you are allowed to do so each year, but there is no deduction and you can end up owing additional taxes.

When gifting, it is generally the person giving that owes taxes on the money or assets gifted versus the recipient. But the IRS does allow an individual to do so annually up to a certain amount without incurring taxes, as well as over their lifetime.

According to the IRS, the annual limit for gifting in 2023 is $17,000 and in 2024 that increases to $18,000. That is per individual to another person.

For example, a couple could each gift a family member $18,000 (total of $36,000) in 2024 with no tax due. And that is per person, so they could gift up to that amount to a son, daughter-in-law and two grandchildren each during the tax year without a gift tax being due.

The lifetime gifting limit (which is aside from the yearly limit) is $12.92 million for 2023 and $13.61 million for 2024. That’s per person, so a married couple could exclude double those amounts in lifetime gifts without owing gift taxes.

Move to a tax friendly state

Another consideration is that of moving to a state that doesn’t charge certain types of taxes, such as income, property, excise, other local, and more.

Obviously, this is something that has to make sense on a number of fronts aside from tax savings in order to be seriously considered.

You definitely want to consider the overall costs associated with such a move, as well as whether that locale is affordable for your situation, meets your goals and priorities, enables the quality of life you want to maintain in retirement, is not too distant from family and friends, and much more.

After making such an assessment, if a move is in your future for the right reasons, then doing so to certain places might gain you the added benefit of reducing your taxes. This is especially true if you currently live in a place where the state imposes taxes on things such as income, property, dividends, interest, and more.

Conclusion

Obviously, there are a number of tips you can take advantage of and things you can do as a retiree to save yourself some money when it comes to paying taxes each year. And you should be certain to do those things if eligible, as they can save you real dollars you will want and probably need in retirement.

But it’s important to think beyond tips when it comes to taxes, especially when approaching or in retirement.

The reality is that you need a tax strategy that is encompassing and integrated with your overall retirement plan. This should cover everything from income to insurance, estate, wealth preservation, asset protection, business, and other areas.

When it comes to taxes, you definitely want to consult with a professional, such as a good retirement planner with tax expertise. That firm or person can minimize the taxes you might owe, even potentially saving you tens to hundreds of thousands of dollars, and more, over the course of your retirement.

At Oak Harvest Financial Group we are here to help you navigate what can be the difficult journey of retirement, especially when it comes to minimizing what you will pay Uncle Sam.

If you are currently utilizing a retirement plan (either your own or one created for you) our team would be happy to review it to determine if it is efficient and capable of really meeting your goals and maximizing your tax savings.

Or we can assist you by creating our very own Retirement Success Plan, a customized retirement plan capable of saving you taxes that can be considerable over the course of your lifetime. We can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!