If you will be celebrating your sixty-fifth year on the planet during 2016, you may be giving more and more thought to the best ways to leave some of your assets to your heirs. With tax rates, rules, and regulations in a seemingly constant state of flux, this planning can be difficult—and you may not feel you have enough assets to justify the creation of a trust. Fortunately, there are several potentially lucrative tax deductions and credits that can help you maximize your retirement savings (or even leave a bit extra to your heirs) without undertaking any additional expense. Read on to learn more about some recent changes to tax law that can benefit you after age 65, as well as some other factors you may want to consider when making tax-planning decisions.
What deductions are available to those age 65 and older?
Once you turn 65, you'll be able to claim a higher standard deduction than those age 64 or younger. During the tax year in which you turn 65 (and each year thereafter), you'll be able to claim an additional $1,200 deduction for you and your spouse or $1,550 if you're single or filing as head of household (HOH). This extra deduction will directly reduce the amount of income, dividends, or required minimum distributions (RMDs) from retirement accounts subject to federal income tax.
Another tax benefit that begins at age 65 involves the deduction of medical expenses. While most individuals age 64 and younger are only able to deduct itemized medical expenses if the expenses exceed 10 percent of this person's adjusted gross income (AGI), this threshold is reduced to 7.5 percent after your 65th birthday. Combining this benefit with a lower taxable retirement income can help ensure medical expenses don't cut into your nest egg.
What recent changes to US tax laws can benefit you?
During December 2015, Congress made permanent several tax credits and benefits that had been extended past their initial term but were still considered temporary. One of these benefits could significantly change the way you contribute to charitable organizations.
This change allows you to transfer funds directly from your taxable individual retirement account (IRA) to an eligible charity. This means that instead of withdrawing these funds, paying estimated taxes on the amount withdrawn, contributing the remaining funds to a charity, and then itemizing your deductions to recapture the taxes paid on your charitable contribution, you'll be able to make this transfer tax-free, without itemizing your deductions or incurring (even temporary) income taxes on the amount contributed. Because any IRA withdrawals can change the tax rate to which your Social Security payments are subjected, this direct transfer can save you even more money.
How will your Social Security payments be taxed after you turn 70?
Even if you've begun receiving Social Security benefits since reaching your full retirement age (FRA) of 67, the tax treatment of these payments may change once you turn 70 and begin taking RMDs from your retirement accounts.
Currently, if your non-Social Security income is more than $34,000 per year (or more than $44,000 if you're married and file jointly), up to 85 percent of your Social Security income may be taxed. For example, if you're single and earn $40,000 per year in taxable RMDs and dividends, plus another $20,000 per year in Social Security benefits, up to $17,000 of your benefits may be taxed at your highest marginal tax rate.
Because of this, it can be wise to visit a certified professional accountant (CPA) or tax attorney if both your income and Social Security benefits are high. Your CPA or attorney will likely be able to direct you to some deductions you may not otherwise have considered, or they may even have you convert certain accounts from taxable to post-tax to help escape the Social Security tax when withdrawing from these accounts in the future. Contact a representative from a firm like Wiesner & Frackowiak, LC for further information.