Tax Tips for Retirees

Tax Planning 0303-Blog

When you retire, your life changes, and your tax situation changes as well. Here are tips to make retired life less taxing and more relaxing.

  1. Think before you commingle retirement accounts. Although rolling all your retirement accounts into one giant IRA may seem like a good idea to simplify your life, think carefully before you do. If you might go back to work and want to roll funds into your new employer’s 401(k) plan, keep prior 401(k) funds in a separate IRA so you can do so.
  2. Take required minimum distributions on time. You must begin taking minimum distributions from your retirement accounts generally April 1 of the year following the calendar year you turn 70-1/2. If you don’t you may face stiff penalties of 50% of what you should have withdrawn. Ouch!
  3. Consider volunteering rather than working. Volunteering your time to help a charity instead of being employed will help you save taxes. That’s because wages are subject to income and payroll taxes, but your volunteered time is not. In addition, you can deduct any expenses you incur in connection with volunteering, such as transportation costs, supplies, uniforms and the like.
  4. Make all required estimated tax payments. Even if taxes are not being withheld from your retirement income, you may still need to pay tax on it. Make quarterly estimated tax payments to avoid penalties.
  5. Deduct continuing care payments. If you are living in a continuing care facility, a portion of the monthly payments likely are medical expenses that you can deduct. Ask your continuing care facility for a statement that say what portion of the bill is tax deductible. You’ll get a tax deduction to the extent those payments plus your other medical expenses exceed 10% of your income (7.5% if you are 65 or older).
  6. Don’t waste tax deductions. If you are in a low tax bracket or have itemized deductions that exceed your income, take taxable distributions from your retirement plans, even if you don’t need the money. Those funds will be subject to little or no tax, and you’ll avoid it being taxed at higher tax brackets later when your income has increased and your tax rate has gone up.
  7. Contribute to a 401(k) if you can. If you work during retirement and have a retirement plan available to you, contribute as much as you can. When you quit working you can draw funds from the plan, likely paying tax at a lower rate than when you were working.
  8. Deduct investment expenses. Any fees you pay for investment advice or accounting services may be tax deductible if they exceed 2% of your income. You can also deduct safe deposit box fees and other investment expenses you incur, such as subscriptions to investment publications.
  9. Claim the standard deduction. If your mortgage is paid off, you may not have many itemized deductions. If you are 65 or older, you are entitled to a higher standard deduction in lieu of itemizing deductions.
  10. Take Qualified Charitable Distribution (QCDs) from Retirement Accounts. One of the best tax breaks for retirees is the tax-free Qualified Charitable Distribution which was permanently extended. If you are 70-1/2 or older you may be able to exclude from income distributions up to $100,000 paid directly to a qualified charity from your IRA account. This is a huge tax savings for retired taxpayers required to receive distributions from their retirement who have paid off their homes and no longer have big tax deductions like mortgage interest.
  11. Sell your home and downscale. If you sell your home, even if you’ve accumulated substantial equity you may not have to pay any tax on your profit. If you have lived in your home for at least two out of the five years before you sell, your profit of up to $250,000 ($500,000 on a joint tax return) is not taxable.

There’s no need to know all of these tax tips. TurboTax will help you claim the tax deductions and credits you are eligible for whether you are planning for retirement or you are in retirement so you can keep more money in your pocket.

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