To all members of HFRRF, Below you will find a great article from USA Today aimed to help retirees during the tax season. Todd Clark. USA TODAY 5 Tax Tips for Retirees; How to keep more of your cash when you need it most Jeff Reeves, Special to USA TODAY Retirement is supposed to be the good life, when you have the time and means to enjoy the fruits of your labors. Unfortunately, some retirees find themselves in a bind because of poor financial planning -- or worse, buried under mountains of paperwork. One of the most common causes of confusion for retirees involves the U.S. tax code. And many of these issues plague older Americans across the board -- regardless of their income, and regardless of whether they are just starting retirement or well into their golden years. So what can retirees do to keep more of their money come tax time, and cut out some of the headaches of dealing with the IRS? Here are five simple but powerful tips: Tip 1: Remember the Higher Standard Deduction Most Americans dont need to itemize their tax returns because they dont have qualified expenses that surpass the standard deduction offered by the Internal Revenue Service. The standard deduction is simply a fixed, minimum amount all taxpayers are forgiven when they file. For tax year 2014, that deduction is $6,200 for single taxpayers or those filing individually, and $12,400 for couples filing jointly. Once you reach age 65, the likelihood youll need to itemize your returns is even less, thanks to a higher standard deduction; seniors get an additional $1,200 if married and filing jointly or $1,550 if filing individually. Put simply, a retired couple over 65 is granted a total deduction of $13,950 even if they dont keep a single receipt or fill out anything other than the one-page 1040 tax form. So even if you have expenses that could be itemized like mortgage interest, it may not matter unless the amount is large enough to surpass the generous standard deduction for seniors. If you dont have a lot of qualified expenses, then save yourself the time of filling out tax forms or a three-figure bill from your accountant and simply take the standard deduction. Tip 2: Watch Your Medical Expenses When asking yourself whether you should itemize or take the standard deduction, its important to watch medical expenses. Given the natural rise in medical expenses as we get older, this area of tax law is quite important to retirees. Qualified medical expenses include co-pays at the doctors office and prescription drug bills, but also a host of other things including glasses or dental work or wheelchairs. Medical and dental deductions often arent worth itemizing for healthy, high-earning Americans. Thats because of a complicated structure where taxpayers can only deduct qualified expenses that are 10% of their income if younger than 65, and 7.5% if 65 or older. In other words, if you are 58 and make $50,000 a year and spend $5,100 on medical bills, you can only write off $100 -- the amount that exceeds 10% of your earnings, or a threshold of $5,000. Once you hit 65, the threshold drops to just 7.5% of adjusted gross income. So instead of having a threshold of $5,000 on that $50,000 in income, youd have a threshold of $3,750 instead -- unlocking a deduction of $1,350. Also of note: If you are not going to reach the spending threshold for a deduction in 2014 or you are not going to itemize, it may be worth deferring qualified expenses to January. Moving a purchase to the new year may unlock a medical deduction on your 2015 returns even if you dont have bills high enough to qualify when you file your 2014 taxes. Review Topic 502 -- Medical and Dental Expenses on the IRS website for more detail and a list of qualified expenses. Tip 3: Take All of Your RMDs Having a bunch saved up in qualified retirement accounts is a good thing. But if you are age 70½ or older, the government requires you to start withdrawing some of that money or face a hefty penalty. So dont let Uncle Sam get his hands on your hard-earned retirement funds -- make sure you down your tax-sheltered retirement plans like an IRA via required minimum distributions each year. The RMD rules apply to all employer-sponsored retirement plans like a 401(k) or a 403(b). They also apply to traditional IRAs and IRA-based plans such as SEPs or Simplified Employee Pensions. The reasoning is simple: You deferred taxes on these funds for years, and the Internal Revenue Service cant get its share until you actually take the money out. However, since RMDs vary based on age and how much you have saved, the math is anything but straightforward. Theres no fixed number here, and youll have to consult an IRS worksheet (available online here) or ask your tax professional for specifics. You can withdraw more than this minimum each year, but if you dont withdraw at least as much as prescribed by the IRS, you may take a hefty penalty of as much as 50% on the sum you should have withdrawn. Tip 4: Rebalance Investments for Risk, but also Tax Efficiency As retirees age, they leave the stage of life when their nest egg is growing and instead enter the stage of life when it is more important to protect those retirement funds. That means moving your money around and rebalancing assets into less-risky investments. But moving money can have big implications on your tax burden, not just your investment risks. Consider that the IRS calculates investment gains on a net basis -- that means, all your total gains vs. all your total losses. In other words, if you sell one investment for a $10,000 gain and another for a $10,000 loss, you dont have a penny of net gains to tax. This trick of tax law is crucial for retirees, particularly those looking to sell some riskier investments like fast-moving stocks and enter into lower-risk investments such as a long-term bond fund. On the surface it makes sense to simply rebalance based on risk, but keep in mind that short-term capital-gains taxes can be as high as 39.6% on investment income. Make sure you keep a close eye on the tax burden of any rebalancing you make in your portfolio, and take advantage of tax efficiency whenever possible as you move towards a more defensive strategy. And dont forget that if your net loss is significant enough to exceed the amount you can deduct this year -- a figure youll find on your Schedule D tax form -- you can carry over the excess losses to the next tax year and reduce your burden then, too. Tip 5: Help is Available, Free of Charge Still feeling overwhelmed about your taxes? Do you have specific questions based on your situation that cant be answered by a simple brochure? The good news is that there are IRS-sponsored volunteer tax assistance programs around the nation to offer free tax help to seniors. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who have less than $53,000 in annual income. Additionally, there is a program called Tax Counseling for the Elderly that offers free tax help to those 60 and older, specializing in retirement issues most important to seniors
Posted on: Mon, 29 Dec 2014 18:41:41 +0000
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