When it comes to retirement in Texas, taxes are often the last thing on your mind. But when you’re looking to maximize your investments during retirement, they can be the most important consideration. That’s why we’re here to help with some tips and strategies on minimizing taxes during your Texas retirement.
Ready to amplify your wealth building and wealth management strategy? Tax planning in San Antonio, TX is done BEST with a Texas financial advisor at PAX.
Learn about the different tax rates for investment income
In Texas, investment income is taxed at a lower rate than other types of income. This is because these taxes are paid by recipients of the investments rather than you. In addition to lowering the tax rate on your retirement savings, this also lowers your taxable income.
The Internal Revenue Service (IRS) provides a table that allows you to calculate how much of your investment income may be exempt from taxation depending on how old you are when you start taking distributions. There are many stipulations, so work with a trained professional to help you steer clear of the tax pitfalls.
The importance of diversifying investments to reduce taxes during your Texas retirement
If you want to lessen the tax burden of your Texas retirement, diversifying your investments can help. This is because it allows you to reduce your risk and make more efficient use of tax-advantaged accounts.
Diversification is the process of investing in different types of assets, like stocks or bonds. If a portfolio contains a variety of investments, it’s less likely that one type will be affected by market fluctuations as much as another (for example: if you have both stocks and bonds). In this way, diversification helps you lower your risk while increasing your return on investment over time.
How to create more savings for retirement
Advanced tax strategies can allow your contributions to grow without taxation, creating more for retirement. There are various types of tax-deferred savings accounts, which include Traditional IRAs, Roth IRAs, and 401(k)s. Additionally, there’s the Health Savings Account (HSA) which allows you to save money for medical expenses in a way that will allow you to avoid paying taxes on it as well.
Another type of investment vehicle that allows you to save without having to pay taxes on your earnings is called an annuity. This is basically an insurance policy that sells itself as being able to help you grow your nest egg faster than if you were just investing in stocks on your own. But at the same time, it ensures that when it comes time for retirement that there will still be money left over for things like food, shelter, entertainment, hobbies, travel, etc.
Estate optimization
Tax planning services at PAX can help you minimize taxes during your retirement. A taxable estate can be reduced with tax optimization. Your tax liability may be reduced greatly with the help of a qualified financial advisor in San Antonio.
There are many factors that go into determining how much taxes you will pay on your estate after you pass away. The goal is to use every legal means available to reduce this number as low as possible—so that your family isn’t left with an unmanageable debt load when they inherit what remains of your wealth.
Read: Estate Planning San Antonio: How To Help Your Family Financially Through A Trust
Don’t forget to claim your home sale and home improvement deductions
If you sold your home or claimed a capital gain on your home, don’t forget to take the following tax breaks:
- The interest on the mortgage is deductible for up to $750,000 of acquisition debt, which includes refinanced mortgages and home equity loans. This deduction does not apply if you already paid off the mortgage during the year.
Interest paid on a home equity loan or line of credit is also deductible. However, this deduction is limited to $100,000 in acquisition debt total – not just acquisition debt used as part of buying or improving your residence.
Tax reduction planning for high medicare brackets and high taxes social security
There are several tax reduction planning solutions that can be utilized to minimize taxes as you enjoy your retirement.
One of the most common situations that may require tax reduction planning is when an individual is in a high medicare bracket and their social security is taxed at the highest rate. These individuals are often 70 and older, with substantial assets outside of their investments and retirement accounts, who have been receiving social security for many years. In some cases, this income puts them in a higher medicare bracket and results in their entire social security payment being taxed at 20%.
Maximizing your medicare deductions can help you keep more of your social security payments. Tax reduction strategies for these individuals include:
- Taking advantage of qualified charitable donations (QCDs)
- Maximizing medical expense deductions
- Maximizing long-term care insurance premiums
Business funding
Tax liability can impede a business owner’s ability to start or maintain a company. Planning enables you to scale up your business more effectively.
Tax planning is important for business funding and financing options because it lowers your tax liability and increases the amount of money that remains in the business. It preserves resources, making them available for reinvesting in the company or expanding its operations. It also positions any new shareholder as someone who will remain vested in the success of the company, rather than being an investor looking to cash out quickly by selling their shares at a profit.
Support for college education
You can use tax reduction techniques with the help of a San Antonio financial advisor at PAX to retain more wealth and establish college funds for your children or grandchildren sooner than later. You can set up a 529 plan today, and then invest in it. Withdrawals from the account will be subject to ordinary income tax if used for qualified educational expenses, but if you wait until your child is a student at an eligible institution they will not be taxed (or even reported on your return).
You can also use Roth IRA distributions to pay for college tuition (and fees) because they are considered investment earnings rather than ordinary income.
Real estate tax deductions in Texas
If you’re thinking about retiring in Texas or already are, it’s important to lower your taxable income and reduce the amount of taxes you have to pay on your real estate. The following list will help guide you through the process:
- Property taxes: You can deduct property taxes paid on your primary residence, as well as any second homes that are not rented out during the year (if they’re used by family members). If they’re rented out, however, only 50% of these taxes are deductible.
- Mortgage interest: If you own a house in Texas, this deduction is especially useful because it applies even if there’s no mortgage attached to the house. For example, when someone owns land but doesn’t have enough cash for construction costs yet or wants to build their own home from scratch without borrowing money from another party first (as would normally be required). If there is a mortgage on record at any point during the year then this deduction should be 100% applicable; if not then up 99% applies instead!
- Selling property in Texas: Make sure you are getting the maximum property tax break possible from your sales taxes. In order to do this, you need to know that there are two different types of property taxes when it comes to real estate:
- (1) Annual ad valorem tax: Rates vary by county
- (2) Disaster relief bond program: Known as “buyout” and refers to a special fund set aside by the State of Texas for eligible homeowners who have been affected by recent disasters such as Hurricane Harvey or flooding events
The Takeaway
The good news is that your investment income may be taxed at lower rates than other types of income, so check with a tax professional team in San Antonio to find out if that’s the case for you. If it is, keep in mind that you may want to invest in something else.
There are so many different ways to minimize taxes during your Texas retirement. You can invest in real estate and receive tax deductions for home improvements, donate to charity and claim the deduction on your taxes, or even make charitable gifts that count as a charitable donation. Do what feels right for you and aligns with your faith.
The PAX Financial Group will help you determine if your investment philosophy matches your faith.
Learn more about how we got started and give us a call to talk about your financial goals, no matter how prepared you feel. We are here to help!
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Biblically Responsible Investing(“BRI”) involves, among other things, screening for companies that fit within the goal of investing in companies aligned with biblical values. Such screens may serve to reduce the pool of high performing companies considered for investment. Investing involves risk. BRI investing does not guarantee a favorable investment outcome. PAX Financial Group has conducted due diligence for their Biblically Responsible Investing (BRI) process and proudly serves as each client’s advocate using fully vetted third-party specialists for the administration of BRI methodology. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product and should not be relied upon as such.
