While most tax rules and tax rates apply equally to all taxpayers, there are some tax law provisions that are particularly senior tax issues because seniors are the ones most affected. Below are a few senior tax issues and an offer to get a more comprehensive booklet if interested. Some minor tax planning in retirement can result in big saving as you shall see.
Immediate Annuities Help Retirees Reduce Tax
Immediate annuities pay a monthly income and few people below age 60 buy immediate annuities as younger people usually derive their income from working, not from investments. The senior tax issue here is the exclusion ratio. For every immediate annuity payment, a significant portion is not subject to tax. This exclusion ratio means that from each payment, a retiree has more spendable income than from alternate investments.
Immediate or Deferred Annuities can reduce the senior tax on social security income
Since people age 62 and over pay tax on social security income, we can refer to this as a senior tax. The ways to reduce income tax on your social security income is by moving money from items that increase the income tax on your social security income negatively (CDs, bonds, tax free bonds, savings bonds) to deferred annuities or immediate annuities. Since none of the reinvested interest from a deferred annuity appears on your tax return, the income on your tax return is lower and thus, this will reduce or eliminate tax on your social security income. This senior tax is also impacted favorably by the ownership of immediate annuities because a large portion of the monthly payments are excluded from reporting on your tax return making immediate annuities a superb source of supplemental retirement income.
Slow down IRA distributions
Since only people that have reached age 70 1/2 must take IRA distributions, the taxation of these withdrawals is certainly a senior tax issue. Some retirees may be taking more than the IRA required mandatory distribution. Even if you need the income for living expenses, you will lower your tax by reducing your IRA withdrawals to the IRS required minimum and spending principal from your non-IRA assets to live on. Although the spending of principal is taboo for many retirees, there is no difference between principal and income. It's all green money and this recommendation will reduce the senior tax on your IRA. This dovetails with our next senior tax issue.
Spend your regular money first
The order in which you spend your different pots of money in retirement affects your taxes. As hinted above, if you take $1 from your IRA, you only have say 70 cents to spend because you must pay income tax on the IRA withdrawals. However, if you withdraw a dollar form your savings account, whether its interest or principal, this money has already been taxed and you have a full dollar to spend. So an important general senior tax recommendation is to use up your after-tax dollars before using your pre-tax dollars.
Long Term Care Insurance
Last, consider that the federal government will subsidize your cost for long term care insurance. Since the average buyer of long term care is age 62 and the government allows a larger deduction based on higher age, this is specifically a senior tax issue. Although not many people qualify, to the extent your out of pocket medical expenses and health insurance premiums exceed 7.5% of your adjusted gross income, you can deduct that excess as an itemized deduction on your tax return. If you pay a long term care premium, that can be added to your out of pocket health expenses thereby making it potentially deductible. You can read more details on utilizing these senior tax benefits in the booklet below. Click on the booklet and get your free copy.
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You Pay More Taxes Than Necessary
And we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.Get Your Copy Now - 6 Ways to Cut Retirement Taxes
I believe that senior taxpaying citizens are being abused by our Government. It has been 26 years that the threshold numbers to determine how much of our Social Security benefits have been adjusted for inflation COLS.
Please visit my website and if possible add a link to your website.
Sincerely,
Charles
This is the best info for me. Thank's!
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Using long term care insurance is a great way have a deduction when taxes come due. Most Seniors have, or at least should have, a long term care policy. It also covers senior home care services so you benefit in a number of ways. This post was very good,
Thanks.
2 other ways are municipal bonds from your state you do not pay taxes on. Dividend stocks you only pay at 15% fedral rate if your income is under certain level. You can also deduct some health care cost but would need help filing tax forms.
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I don't believe SSI or pension benefits should be taxed. However it you have a normal job you should be taxed like everyone else. I wouldn't get too excited about the Obama plan though. The numbers overall do not add up so there is very little chance that anything he has promised in this area will come to pass.
You may want to think of long term care insurance as an umbrella insurance policy for your portfolio. If you don"t have this long term care coverage and happen to need it due to a disabling injury or diease you will face the evaporation of your entire savings and investments. so, for under $200 per month...long term care is a easy solution.
Any advice on what these soon-to-be retirees can do to cut taxes? That could enable a percentage to retire years earlier.
Long term care insurance is one of the mroe confusing aspects of the taxation on seniors. That book is great though. Highly recommend that one. Thanks for the info!
-Jim
Having enough knowledge concerning taxes, I do believe that senior citizens should have less taxes since they have been paying that for like..forever. Well in some instances dwindling taxes may be disregarded depending on the economic status of the senior citizen.
Another excellent post, very informative! Long-term insurance has always been a fuzzy subject. I appreciate the recommendation of the book also. I am going to look into purchasing that soon.
Very good post! Oh my gosh Tax season is right around the corner how prepared are you? Long Term Care Insurance is the most confusing. But, if you have someone work through it with you it isn't that bad?
Talk to an expert on annuities or structured settlements depending on your situation.
Thank you airfare and everyone else for the helpful websites on annuities…
2 other ways are municipal bonds from your state you do not pay taxes on. Dividend stocks you only pay at 15% fedral rate if your income is under certain level. You can also deduct some health care cost but would need help filing tax forms.
Any advice on what these soon-to-be retirees can do to cut taxes? That could enable a percentage to retire years earlier.
Extremely useful post I must say. Really would be helpful to a lot of our senior citizens. Especially with the economic crisis. thanks a bunch for the effort. Cheers
Those are some very useful tips, now that I'm getting close to my retirement. I need any advice on tax planning I can get, thank you for this.
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This is very useful advice. The points made on reducing the tax bill on long-term care insurance are particularly useful. The 7.5% threashold seems quite high, lowering this rate would help to support senior citizens further. I have written a blog on senior health insurance that might be useful to readers.
Very good article. I really did find some very good information. I am planning to retire in few years. Now I can prepare for it. Thanks again
Thanks for discussing senior tax issues in details.