During retirement you will want to maintain a quality of life that is acceptable and comfortable for you. This means having an effective wealth management plan in place, including strategic tax planning which can help minimize your tax bill during and leading up to your golden years. Failure to plan for limiting tax liabilities during retirement can be problematic since you may have no or little income during this time.
Here are a few techniques and strategies you can use to mitigate tax liabilities during the later years of your life.
Standard deduction for retirees
Once you reach 65 years of age or older your standard deduction amount will increase which can be helpful since most usually do not itemize and take the standard deduction on their tax returns. Also, even those who tend to itemize deductions while working will be more likely to not itemize in retirement, making a higher standard deduction quite helpful.
Higher 401(k) contribution limits
To prepare for retirement many people will use a 401(k) account which can help shelter their income from tax liabilities until they withdraw the funds. However, there is an annual limit to how much money you are allowed to contribute to a 401(k). Currently, the limit is $19,500 if you are under the age of 50 years. However, once you reach 50 years of age your limit increases to $26,000.
Deductions for medical expenses
With old age comes more chances of health problems and increasing medical expenses during retirement years. The good news is you can minimize the negative effects of medical expenses by deducting these expenses on your itemized tax return. As of now, the law allows you to deduct medical expenses over the amount of 7.5% of your reported adjusted gross income.
You may also be able to deduct some of what you spend on long-term care insurance premiums. The older you are, the more you are allowed to deduct for these insurance costs.
Selling your primary home
Oftentimes, retirees who had children living with them find that once their children move out, their home is too large for their needs. This can prompt many to sell their primary residence in order to move into a smaller residence.
Selling real estate which has appreciated in value may incur capital gains taxes. However, if it is your primary residence and not your vacation home or investment property (other exclusions apply), you are allowed to deduct as much as $250,000 from reported capital gains if you are single. For married couples filing jointly, the limit is $500,000.
Create a tax plan right away
The sooner you start thinking about tax liabilities leading up to retirement and during your golden years, the more effective the steps you take to minimize these costs will be. Contact us if you are wanting to take advantage of these techniques and strategies.
Opinions expressed in this blog post are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. The material presented herein is not a recommendation of any kind. Raymond James Financial Services and its advisors do not offer legal or tax advice. You should discuss any tax or legal matters with the appropriate professional. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.