The Most-Overlooked Tax Breaks for the Newly Retired
by Anthony Rivieccio, MBA,PFA
*Bigger Standard Deduction
When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2015 returns, a single 64-year-old gets a standard deduction of $6,300 (it will be the same amount for 2016). A 65-year-old gets $7,850 in 2015 (and $7,850 in 2016).
The extra $1,550 will make it more likely you’ll take the standard deduction and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket.
*Easier Medical Deduction
Until 2017, taxpayers age 65 and older get a break when it comes to deducting medical expenses. Those who itemize 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%
*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.
*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. 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.
*Timing Tax Payments
Although ours is widely hailed as a “voluntary” tax system, it works best when there is the least opportunity not to volunteer.
Employers have become the country’s primary tax collectors by withholding taxes from our paychecks. When you retire, you break out of that system: Now it’s up to you to make sure the IRS gets its due when it’s due. If you wait until the following April 15 to send a check, you’re in for a nasty surprise in the form of penalties and interest.
You have two ways to get the job done:
Withholding: If you receive regular payments from a company pension or annuity, the payers will withhold tax. . . unless you tell them not to. The same goes for withdrawals from an IRA.
With pensions and annuity payments and traditional IRA withdrawals, taxes will be withheld unless you file a Form W-4P. When it comes to traditional IRA distributions, withholding will be at a flat 10% rate, unless you request a different rate or block withholding all together. Withholding isn’t necessarily a bad thing, as it stretches your tax bill over the entire year. It might also make life easier if you would otherwise have to make quarterly estimated tax payments.
Quarterly estimated tax payments. The alternative to withholding is to make quarterly estimated tax payments. You need to if you’ll owe more than $1,000 in tax for the year above and beyond what’s covered by withholding. Otherwise, you’ll face a penalty for underpayment of taxes.
*The RMD Workaround
Although estimated tax payments are considered made when you send the checks, amounts withheld from IRA distributions are considered paid throughout the year, even if they are made in a lump sum at year-end. So, if your RMD is more than large enough to cover your tax bill, you can keep your cash safely ensconced in its tax shelter most of the year . . . and still avoid the underpayment penalty.
*Avoid the Pension trap
If you get a lump-sum payment from a company plan, you could fall into a pension-payout trap.
If you take such a payment, the company is required by law to withhold a flat 20% for the IRS … even if you simply plan to move the money to an IRA via a tax-free rollover. Even if you complete the rollover within the 60 days required by law, the IRS will still 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. Simply ask your employer 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 withholding.
*Give Your Money Away
If the estate tax might be in your future, be sure to take advantage of the annual gift-tax exclusion. This rule lets you give up to $14,000 annually to any number of people without worrying about the gift tax. If you have three married children and each couple has two children, for example, you can give the kids and grandkids a total of $168,000 in 2015 without even having to file a gift tax return. Money given under the protection of the exclusion can’t be taxed as part of your estate after your death.
Anthony Rivieccio is the founder & the CEO of The Financial Advisors Group, celebrating their 20th year as a fee only financial planning firm specializing in solving one’s financial problems. Anthony, a recognized financial expert since 1986, has been featured by many national and local media including: Klipingers Personal Finance, The New York Post, News12 The Bronx, Bloomberg News Radio, Bronxnet Channel 67 TV, The Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Bronx News and The Bronx Chronicle.
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