For those who are approaching retirement age, it is important to take steps to put appropriate tax planning into place.
The purpose of this article is to outline some of the key tax strategies retirees should keep in mind.
The Good and Bad of a Fixed Income
One of the main reasons tax planning is important for retirees is because many retirees are on a fixed income. These individuals simply do not have the power to increase their income.
While this means that for a retiree minimizing the amount of money paid toward income tax is more important than ever, it also means that the individual can often control how quickly and when they receive that income. Controlling the timing of income is one of the underlying tax strategies noted in more detail below.
Deductions , Exemptions, and Accelerated Income
Retirees can still take standard or itemized deductions on their income taxes, as well as certain personal exemptions. A retiree should seek to match the income they receive with these deductions and exemptions. This means the retiree should accelerate receipt of income from available sources into years with higher deductions and exemptions.
This would include at a minimum matching income against deductions that typically recur year after year, such as mortgage payments, real estate taxes, and tax preparation fees. In addition, income payments should be accelerated into those years when one-time deductions exist, such as medical expenses and larger-than-normal charitable contributions.
By accelerating or deferring income payments based on recurring and one-time deductions, you can minimize the income tax paid on that income and make sure you are able to take full advantage of the deductions and exemptions legally available to you.
Certain income is tax free to individuals. This includes interest from municipal bonds. In addition, capital gains income on the sale of a primary residence is exempt in the amount up to $250,000. This capital gains amount is doubled to $500,000 for a married couple.
You can further take advantage of the capital gains exemptions on the sale of your home since you can use it once every 24 months. You can do this by purchasing a home in need of some repairs, making those repairs yourself, and then selling the home after you have lived there at least two years. Any capital gains from the sale will again be tax exempt up to the thresholds noted above.
Income that is not needed for a present spend should not be withdrawn in the current year. This pushes the payment of income taxes on that income into the future, which leaves more money in your hands to earn income.
Receiving Assistance with Tax Planning
You can get help with tax planning strategies by speaking with a tax attorney. A tax attorney will be familiar with the tax laws in place for each state and can help review how you can best take advantage of those tax laws given your income and expenses.
You can take the first step in getting this help by calling the phone number located at the top of this web site. The first conversation is free of charge and does not obligate you to anything further, so make the call today to get started on planning for your retirement.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.