Many seniors have a financial plan in place for retirement, but even during this time of relaxation, you still have to worry about taxes. Taxes can be a complicated or confusing part of retirement planning, but that doesn’t mean you should navigate this alone.
To help you get through this new tax season, here are ten tips for seniors to help you save money and avoid potential financial pitfalls. You can use these tips during any tax season, but these shouldn’t be a substitute for professional advice. Be sure to connect with a financial advisor before making big decisions about your money or filing taxes.
1. Take Advantage of Tax Deductions and Credits
The IRS offers many tax deductions and credits specifically for senior citizens. For instance, if you’re 65 or older, you might qualify for a higher standard deduction, so you may not have to itemize your deductions. Additionally, special deductions are available for medical expenses, charitable contributions and property taxes.
2. Consider Delaying Social Security Benefits
If you haven’t started receiving your Social Security benefits, you may consider delaying them until you reach the full retirement age of 67 or later. Waiting for your Social Security benefits helps maximize your benefits while avoiding potential taxes on your Social Security income.
3. Be Aware of the Required Minimum Distributions
If you have a 401(k) or traditional IRA, you are required to take minimum distributions starting at age 72 (or age 70 ½ if you turned that age before January 1, 2020). Failure to do so can result in penalties of up to 50 percent of the amount you were supposed to withdraw. To avoid such forfeitures, consult with your financial advisor or talk to a tax professional who can help ensure you meet all requirements.
4. Ask About a Roth Conversion
Regarding traditional IRAs or 401(k)s, consider converting some or all of those funds to a Roth IRA. You will end up paying taxes on the amount you convert, but the funds in the Roth IRA will grow tax-free, and they aren’t subject to required minimum distributions.
5. Understand the Tax Implications of Retirement Account Withdrawals
Withdrawing money from your retirement account, whether an IRA or 401(k), can result in tax increases. Depending on your retirement account, your withdrawals may qualify as ordinary income, and you could incur a significant tax bill. To avoid this, talk to your accountant or financial advisor to find ways to minimize the tax impact on any withdrawals.
6. Consider Charitable Contributions
Qualified charitable contributions allow you to deduct up to 60 percent of your gross income. If you want to make charitable contributions, consider donating appreciated assets (assets whose values continue to grow). Examples of appreciated assets include real estate, mutual funds, and stocks.
Contributing appreciated assets helps you do two things. First, it enables you to avoid potential capital gains taxes. Second, it offers a larger tax deduction than if you simply donated cash.
7. Take Advantage of Tax-Free Gifts
The “gift tax” is a federal tax on financial transfers to another person without expecting repayment. If you want to give your family or friends gifts, consider taking advantage of the annual gift tax exclusion during this tax season. 2023’s rules allow you to give up to $17,000 per recipient per year without incurring any gift taxes.
8. Know the State-Specific Tax Laws
Each state has its tax laws, so you must be mindful of any state-specific tax credits or deductions available to you. Talking to your accountant or another tax professional can help you ensure you’re taking advantage of all the state-specific tax benefits available.
9. Keep Track of Your Medical Expenses
Medical expenses offer a significant deduction opportunity for older adults. Track all costs, including premiums for long-term care, as you can deduct these from your taxes.
10. When in Doubt, Work with a Tax Professional
Ultimately, you shouldn’t try to navigate taxes alone, as there are just too many things to understand, keep track of, and record. Even the best of us need help sometimes. Working with a tax professional, accountant or financial advisor can help you navigate tax season 2023 and ensure you take advantage of all senior-specific tax benefits.
Make Tax Season 2023 a Success
These tax tips for seniors can help you save money while avoiding potential tax pitfalls. Talk to a trusted financial professional about the information listed here to see what opportunities you qualify for!