Some federal tax laws adjust to offer varying benefits or tax breaks at different age brackets. This can present opportunities to save or alternatively, create costly pitfalls to avoid. Being alert to the rolling changes that come at various life stages is the key to holding down your tax bill to the legal minimum. Below are a few ideas that the 65 and older might want to consider.
1. Bigger Standard Deduction
When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2016 returns, for example, a single 64-year-old gets a standard deduction of $6,300 (it will be $6,350 for 2017). A 65-year-old gets $7,850 in 2016 (and $7,900 in 2017).
The extra $1,550 will make it more likely you’ll take the standard deduction rather than itemizing and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket. Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. When both husband and wife are 65 or order, for example, the standard deduction on 2016 joint returns is $15,100 (and $100 more for 2017). Be sure to take advantage of your age.
2. Easier Medical Deductions
Until 2017, taxpayers age 65 and older get a break when it comes to deducting medical expenses. Those who itemize on 2016 returns get a money-saving deduction to the extent their medical bills exceed 7.5% of adjusted gross income. For younger taxpayers, the AGI threshold is 10%. If you’re married, only one spouse needs to be 65 to use the 7.5% threshold. For 2017 returns, the 10% threshold will apply to all taxpayers.
3. Deduct Medicare Premiums
If you become self-employed—say, as a consultant—after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses for those age 65 and older in 2016. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse's employer (if he or she has a job that offers family medical coverage).
4. Spousal IRA Contribution
Retiring doesn’t necessarily mean an end to the chance to shovel money into an IRA. If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own. If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½. If you use a Roth IRA, there is no age limit. As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter’s doors remain open to you. The $6,500 cap applies in both 2016 and 2017.
5. Avoid the Pension Payout Trap
Upon retirement, many retirees are offered the opportunity to take a lump-sum payment from their company plan, such as pensions, annuities, IRAs and other retirement plans. However, if you take a lump-sum payment from a company plan, you could fall into a pension-payout trap where the IRS mandates you withhold a flat 20% for income taxes… even if you simply plan to move the money to an IRA via a tax-free rollover. The IRS will hold on to the 20% until you file a tax return for the year and demand a refund.
Fortunately, there’s an easy way around that miserable outcome when initiating a rollover from your employer sponsored plan to an IRA. Simply ask your employer or Certified Financial Planner to send the money directly to a rollover IRA. As long as the check is made out to your IRA and not to you personally, there’s no tax withholding.
Even if you intend to spend some of the money right away, your best bet is still to ask your employer to make the direct IRA transfer. Then, when you withdraw funds from the IRA, it’s up to you whether there will be withholding.
To find out which of the above strategies is appropriate for you, consult your Certified Financial Planner or CPA. Some can be utilized in combination, but others should be selected in lieu of one another, so find out which will provide you with the greatest benefits overall.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.