Raise your hand if you keep up with the never-ending changes to the U.S. tax code! If you are nearing retirement or have recently retired, you may be concerned about how you will manage your tax liabilities once you are retired.
There can be several overlooked deductions and tax credits that can help you lower your taxable income, especially if you have a more complex financial situation.
As San Antonio retirement planners, we thought this blog, “Maximize Savings: Key Tax Deductions Every Senior Must Know,” could assist you in identifying commonly missed tax deductions or credits that can help reduce your tax liabilities so you don’t pay more than is necessary.
The U.S. tax code has been impacted by the Tax Cuts and Jobs Action in 2017 and, more recently, by the Inflation Reduction Act. Here’s a look at several often-overlooked tax deductions that can be highly beneficial for seniors
Increased Standard Deductions
For the 2023 tax year, the standard deduction has risen to $13,850 for single filers and $27,700 for married couples filing jointly. Seniors aged 65 and over are eligible for an additional $1,850 (single filers) or $3,000 (married couples, if both are over 65), potentially increasing your standard deductions to $15,700 and $30,700, respectively.
This change is especially advantageous for seniors with lower annual incomes. It effectively lightens their tax burden, allowing them to keep more of their hard-earned money for basic expenses and increased financial security later in life.
Spousal IRA Contributions
Another tax deduction to consider as a part of your San Antonio, TX, retirement planning is spousal IRAs. Here’s how it works.
The working spouse can contribute to their own IRA and a spousal IRA in the name of their non-working or lower-earning spouse. This contribution can be made as long as the working spouse’s income meets the eligibility requirements and the total contributions don’t exceed the annual IRA contribution limits.
The primary benefits are twofold. First, it allows the non-working or lower-earning spouse to build their retirement savings, potentially reducing the financial burden on the working spouse to produce retirement income. Second, it reduces the overall taxable income for the couple, which can lead to lower tax liabilities both now and in the future (during retirement years).
For 2024, you can contribute up to $7,000 annually to your traditional or Roth IRAs under 50 or $8,000 if you are 50 or older. This is contingent upon the lesser of these amounts or 100% of your eligible compensation.
A significant feature to remember is the combined limit for couples. If both spouses are 50 or over, they can collectively contribute a maximum of $16,000, split between their respective IRAs.
It’s important to note that this limit applies across all your IRAs. For example, if you hold a traditional and a Roth IRA, you could allocate $3,500 to each within the $7,000 limit.
There are no compensation or income ceiling limits for making traditional IRA contributions. With that said, if you have a higher income, you may face additional restrictions on tax deductions based on your contributions. You can learn more about this in IRS Publication 590-A.
If you are contributing to a Roth IRA, there are income thresholds. In 2023, a married couple filing jointly with a modified adjusted gross income (MAGI) of up to $230,000 can fully contribute to each of their Roth IRAs. They’re eligible for partial contributions if their income falls between $230,000 and $240,000. Above $240,000, eligibility for Roth IRAs ceases. You may consider a backdoor Roth IRA if your income exceeds the thresholds.
Qualified Charitable Distributions
At PAX Financial Group, we suggest one retirement tax planning strategy for clients who are 70½ or older is making qualified charitable distributions (QCDs) from traditional IRAs.
Qualified charitable contributions allow you to directly transfer up to $100,000 from your Individual Retirement Accounts (IRAs) to eligible charitable organizations without incurring any federal income tax on the distribution.
This method of giving benefits both you and the charity. It serves as a tax-efficient way for you to support causes that are important to you while also potentially reducing your taxable income. These contributions count toward your required minimum distribution (RMD) for the year, which can be advantageous if you don’t need the full RMD for living expenses.
Medicare Premium Deductions for the Self-Employed
Medicare Premium Deductions can significantly impact your retirement planning in San Antonio if you are self-employed and 65 or older. Here’s a look at how it works.
Self-employed individuals are generally eligible for Medicare at age 65, just like traditional employees. This includes Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance).
Medicare Part B comes with a monthly premium cost. For self-employed individuals, these premiums are typically deducted from their Social Security benefits. It’s important to note that the premium amount may vary based on income.
The Medicare Part B premium is income-dependent. If your income surpasses a certain threshold, you may be subject to higher premiums, known as Income-Related Monthly Adjustment Amounts (IRMAA).
If you are self-employed, you are also responsible for paying the self-employment tax, which covers the employee and employer portions of Social Security and Medicare taxes. This tax can impact your overall net income, affecting the IRMAA thresholds.
Planning the timing of your Medicare enrollment and Social Security benefits is crucial. You may want to consider delaying enrollment in Medicare Part B if you are still covered by a group health plan through self-employment, which can help avoid penalties and minimize your premium costs.
About PAX Financial Group
At PAX Financial, we view retirement not as a final life chapter but as an exhilarating new beginning. We’ve coined this transition with “PIVOTING” — a step into life’s next exciting, fulfilling phase.
Our innovative PIVOT Retirement Planning™ system is designed to guide clients through more than just financial readiness for retirement. We aim to comprehensively prepare you for this significant life change, addressing financial, emotional, and physical aspects. Retirement should be a time of joy, activities, and family, which truly can be the golden years.
At the same time, retirement can feel overwhelming, particularly considering the impact on your spouse and children. With numerous factors to consider, it’s a complex process but rewarding if managed correctly.