Tips for Upcoming Tax Changes Affecting Retirees and Pre-Retirees

Although this blog is for people near retirement or already retired, this first tip applies to every taxpayer.

It has always surprised me that accountants do not contact their clients in October and November to help them reduce their tax bill for the year. If you wait to see your accountant next February or March to prepare your tax-return for the current year, it is too late. Once December 31 passes, there are many items you cannot correct or change and IRS will have trapped you into paying more tax than necessary; the damage is already done and you cannot turn back the clock. So if you have a tax-preparer who is not smart enough to have you come in now, then take the initiative and bring all of your tax information, check book and investment statements so he can see the ways you can save taxes before December 31 comes and goes.

Tax changes in the next 60 days that affect Seniors

IRA Transfers to Charity

For the last few years, a person over age 701/2 had the opportunity to donate up to $100,000 of their IRA to charity and not need to report the distribution on their tax return. This solved a big headache for those who wanted to use their IRA for charitable purposes. Since these direct transfers to charity aren't counted as part of adjusted gross income, this provision helps prevent the loss of itemized tax deductions, phase out of personal exemptions or credits, additional amounts of Social Security being taxed or even the imposition of the new 3.8% surtax on investment income. That tax break is now coming to an end. If you want to use any of your 2013 IRA distributions for charitable gifts, then you must do so by December 31, 2013.

Increased Deductions for Qualified Long Term Care Policies

Attained Age Before Close of Taxable Year	2013 Deductible	2014 Deductible Limits
40 or less	$360	$370
More than 40 but not more than 50	$680	$700
More than 50 but not more than 60	$1,360	$1,400
More than 60 but not more than 70	$3,640	$3,720
More than 70	$4,550	$4,660

Source: IRS Revenue Procedure 2012-41 (2013 limits) and 2013-35 (2014 limits)

Continued Tax Break on Medical Deductions

For people under age 65, they can only get a tax deduction for medical expenses that exceed 10% of their income (only a small percentage of people qualify). For people age 65 or better, the deduction threshold is still 7.5% of income until December 31, 2016 so enjoy the small tax break while it lasts. Note that premiums for long-term care insurance get deducted as a medical expense so for some seniors, the current deduction structure provides an extra incentive to obtain long-term care insurance and have the government share more of the cost ( deductions subject to the limits in the previous paragraph).

Threat of Reduced Estate Tax Exclusion

For high net worth seniors who can now leave an estate of $5.25 million without estate tax, be aware that the President's budget for 2014 calls for reducing that to $3.5 million (effective 2018). The relevant tax planning would be to make gifts now or remove assets from estates using trusts such as grantor retained income trusts.