The benefits of having a solid tax strategy always last – even in retirement!
Did you know that unique tax strategies are available after you turn 65? If you’ve reached or are nearing this age milestone, this blog is for you! Today, we’re sharing five unique tax moves you should use when you turn 65.
Let’s dive in.
#1 – Utilize All Available Tax Credits
You’re likely familiar with tax deductions, but what about tax credits?
Tax credits are a specific amount of money that taxpayers can subtract directly from the taxes they owe.
That being said, tax credits favor deductions because they directly lower your tax bill. But it gets even better because there are credits explicitly designed for individuals 65 and older.
Let’s look at some of the credit options you may qualify for.
- Tax Credit for the Elderly or Disabled: This credit can lower your tax bill between $3,750-$7,500, but you must meet income restrictions to qualify. A single tax filer’s income must be less than $17,500 AND total taxable social security benefits below $5,000 (more details on Social Security taxes to come). To check your qualification status, you can use this IRS tool.
- Earned Income Tax Credit: You can think of this credit as a “bonus” to supplement wages and counteract the impact of Social Security taxes. This credit also has an income requirement to qualify.
- Residential Energy Credit: If you’ve made energy-efficient home updates recently listen up! You could receive a tax credit of up to 30% of the costs you paid to make energy-efficient updates.
- Electric Vehicle Credit: If you’ve purchased an electric vehicle, you could qualify for a tax credit of up to $7,500, depending on how long you’ve been using the vehicle.
- Premium Tax Credit: This credit can help you lower health insurance premium costs. To qualify, you must have coverage through a healthcare marketplace and meet income requirements.
Bonus Tip: People over 65 can apply for property tax relief in some states. This can include deferrals, other tax credits, exemptions, and rate freezes.
#2 – Have a Plan For Your RMDs
Required minimum distributions (RMDs) are the amount you must take out of your retirement savings accounts annually to avoid tax consequences.
The amount of RMD you must take is decided by dividing the saving account’s year-end market value by the life expectancy factor determined by the IRS.
RMDs can be tricky because the timing at which you make withdrawals is essential. You must start taking RMDs by April 1st, the year after you turn 73. Every year after, RMDs are required to be taken by December 31st.
Why is timing critical? Let’s take a look at an example. If you choose to take your first RMD between January and April, the year after you turn 73, you must take two RMDs that year since the subsequent RMD is required by December 31st. Withdrawing this much from your retirement accounts could place you into a higher tax bracket that year.
If this concerns you, work with your financial advisor to determine the best withdrawal schedule for you and your financial goals.
#3 – Consider Deducting Your Medical Expenses
Did you know that you can deduct medical expenses?
If you itemize your annual tax deduction, remember to deduct any medical expenses you paid out of pocket that are more than 7.5% of your adjusted gross income (AGI).
Qualifying expenses can include:
- Inpatient hospital care
- Nursing services (either in-home or a facility)
- Medical insurance premiums
- Long-Term Care Services
- Long-Term Care Insurance premiums
- Home renovations for medical purposes,
The maximum amount you can deduct in a particular tax year depends on your age and changes annually.
This chart shows the maximum deduction amounts over the last couple of years:
#4 – Consider Taking The Higher Standard Deduction
Another benefit of turning 65 is being eligible for lower taxable incomes through a higher standard deduction.
While tax season has passed, let’s look at an example of how the higher deduction helped 2022 taxpayers.
For 2022 tax returns filed in 2023, taxpayers could add an extra $1,750 to the standard deduction if unmarried and not a surviving spouse. For those that are married, that number changed to $1,400.
Standard deduction amounts for 2022 before the older adult bonus were as follows:
- $29,900 for married taxpayers who file jointly and qualifying widow(er)s
- $19,400 for heads of household
- $12,950 for single taxpayers and taxpayers that file separately.
You always have the option to either itemize or take the standard deduction, but you can’t do both. The right choice depends on your circumstances, so it’s best to determine a course of action with your financial planner.
#5 – Determine If And How You’ll Pay Taxes on Your Social Security Benefits
Depending on your income, you may have to pay taxes on your Social Security Benefits.
If you file your federal tax return as an individual, you may have to pay Social Security tax if:
- Your combined income is between $25,000 and $34,000 (up to 50% of your benefits may be taxed)
- Your combined income is more than $34,000 (up to 85% of your benefits may be taxed)
- Your married and file a separate tax return, it’s estimated that you’ll likely have to pay taxes on your benefits.
No matter the tax amount, options for how and when to pay your taxes are available. This includes quarterly payments or withholding federal income tax from your benefits.
If you just turned 65, you may have further questions about taxes, retirement withdrawals, Social Security Benefits, Medicare, insurance, and more. Toberman Wealth is here to help!
We partner with a CPA to deliver robust tax planning to help reduce your tax burden because every solid financial plan has a tax plan working congruently with it!
It’s never too early to plan. If you have questions or need financial guidance, please reach out today.
Craig Toberman is a Partner at Toberman Becker Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.