Everyone wants to keep more money they have worked hard to obtain. Fortunately, several tax deductions are available for seniors, many of whom are living on fixed incomes.
The IRS provides several tax deductions for seniors, many of whom may not be aware of themselves or their families. Additionally, you or a loved one may be qualified for even more benefits at the state level.
This article will help you or your loved ones find ways to reduce your burden even at 50.
How To Reduce Your Taxes As A Senior
Contrary to what most people know, there are ways to minimize the taxes you’ll pay as a retiree even before you reach 65. Here are some ways you can try:
Larger IRA contributions
The maximum IRA contribution for people 50 and older is $1,000 extra, making the total annual contribution $7,000. These donations serve as a tax deduction for a traditional IRA. Additionally, you are no longer subject to an early withdrawal penalty for these funds once you reach the age of 5912.
401K catch-up contributions
Even though very few people use this benefit, those over 50 can increase their 401(k) contributions by $6,500 for 2022, increasing the total allowed contributions for the year to $27,000. Traditional 401K(k) contributions are made using pre-tax money, reducing your taxable income while assisting with retirement savings. The catch-up contribution cap applies to plans under 403(b), SARSEP, and 457(b).
SIMPLE IRA or SIMPLE 401(k) increased limits
A SIMPLE IRA or SIMPLE 401(k) participant 50 years of age or older can deposit an extra $3,000 into their account. The overall annual cap is increased from $14,000 to $17,000. Small business employers provide these SIMPLE plans, often called Savings Incentive Match Plans, for Employees.
Higher HSA contribution
There is a $1,000 “catch-up” contribution limit for those 55 and older to their Health Savings Account (HSA). These tax-exempt contributions may cover the majority of medical expenses. Although you must be enrolled in a high-deductible health insurance plan, an HSA has no income restrictions (HDHP).
Divide pension income with your spouse/common-law partner
Do you anticipate paying more taxes in retirement than your spouse or common-law partner? If you receive pension income, you can give your spouse up to 50% of it to lower your overall tax burden. The amount of tax savings can be substantial, depending on various circumstances, such as the difference in your marginal tax rates.
Move to a tax-friendly state.
Different states have different tax policies. According to AARP, nine states have no income tax, and several don’t tax Social Security.
After retirement, your employment won’t set geographic restrictions on where you can live, so moving someplace with lower state tax obligations might make sense.
Below are some examples of state tax benefits and exemptions:
- Social Security payouts are not subject to taxation in South Carolina. Additionally, people over 65 can remove up to $10,000 of their retirement income.
- Some states, including Tennessee, Arizona, and Colorado, don’t impose inheritance or estate taxes.
- Property taxes are relatively low in areas like Delaware, which considerably eases living on a fixed income.
- There are several states without income taxes, including Florida and Nevada.
Here are tax-friendly states, according to the U.S. News & World Report;
- Alaska
- Florida
- Hawaii
- Illinois
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Make strategic withdrawals
You need to take required minimum distributions (RMDs) from specific tax-advantaged retirement accounts, including 401(k)s and IRAs, after you turn 72. Your age and account balance, among other variables, will affect how much you receive in distributions.
However, besides these restrictions, you are largely in charge of when and how to withdraw money. You could take greater taxable distributions from your accounts during a year when you anticipate having lesser income so that the money can be taxed at a reduced rate.
Choose tax-free investments
To maintain an appropriate amount of risk as they age, retirees frequently transfer a portion of their retirement savings into bonds. Municipal bonds are not subject to federal income tax, although Treasury bonds are typically free from state and local taxes. Investigate these possibilities to see if they belong in your portfolio.
Invest for the long term
If you’ve held the investment for at least a year and a day, you may be taxed on your investment income at either the short-term or long-term capital gains rates. Long-term capital gains are taxed substantially less heavily than short-term capital gains.
Bottomline
Seniors have several options for maximizing their financial security through low-risk investing. In addition, these investments provide seniors with considerable tax benefits that allow them to enjoy their post-retirement years without worrying too much about taxes.
These techniques can increase your after-tax retirement income, even if you won’t be able to completely avoid paying taxes in retirement. Remember that what matters is what you keep, not what you earn.
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