Retirees who file their taxes quarterly may feel like every season is tax season, but preparing for the April tax deadline is a good time to seek out new deductions and plan some strategies for the year ahead.
You might be hitting a tax sweet spot, a period of relatively low income because you’ve retired but not yet started collecting Social Security or taking distributions from retirement accounts. If so, now might be a great time to take some money out of the deferred accounts, even if you don’t need to spend it right away.
And if you’re 65 or older, medical expenses must equal just 7.5 percent of your adjusted gross income (not the 10 percent for younger taxpayers) to qualify for the medical and dental expenses deduction.
Here are some more tips:
The IRS sponsors the Volunteer Income Tax Assistance program, which offers free tax preparation assistance to the elderly and people who generally make $53,000 or less. To find a program near you, call 1-800-906-9887 or check out irs.gov/vita.
If your income declined last year because you retired or lost a spouse through death or divorce (among other reasons) but you still face higher Medicare premiums for Part B and prescription drug coverage based on that income, be aware you can fill out a form requesting a recalculation. Check out socialsecurity.gov/forms/ssa-44.pdf.
Credits and deductions
If you were born before Jan. 2, 1950, you can take a higher standard deduction if you choose not to itemize (the IRS considers your age 65 on the day before your 65th birthday). The amount varies based on your tax status. To see if you are eligible for the tax credit for the elderly, check out IRS Publication 524.
On the house
As you think about your tax situation for 2015 and beyond, try to expand the number of income options you have for generating cash without generating a big tax bill, experts say.
It might make more sense for some seniors, for example, to tap home equity through a line of credit on a reverse mortgage rather than taking a retirement account distribution that would boost them into the next tax bracket, said Wade Pfau, professor of retirement income at the American College of Financial Services.
Of course, retirees need to weigh all the pros and cons, including whether the fees would outstrip the taxes owed on an IRA distribution, but the same concept could be applied to other retirement assets, Pfau said. Distributions from Roth IRAs and cash values built up in life insurance policies could also be potential alternative sources of income, he said.
Bracketology — it’s not just for basketball
Even people who have already retired can diversify their tax profile for 2015 and beyond. Converting portions of tax-deferred retirement accounts to Roth IRAs in the first years of retirement when income is down allows them to pay taxes on the conversion at a lower marginal rate, experts said. The idea is to convert just enough so that the added income won’t push you into a new marginal tax rate.
Even if you can only convert, say, $5,000 a year, if you do that for several years before required minimum distributions from retirement accounts kick in, you could make a serious dent in the portion of your nest egg that will be subject to required minimum distributions, notes Warren McIntyre, a financial planner with VisionQuest Financial Planning in Troy, Mich.
Get gains behind you
You can also take advantage of a lull in taxable income to sell investments in your nonretirement accounts and take advantage, if you qualify, of the zero percent capital gains rate in the 10 percent and 15 percent ordinary income tax brackets, notes Doug Bellfy, a financial adviser with Synergy Financial Planning in South Glastonbury, Conn.
He used this strategy with new clients who have recently moved to the 15 percent marginal rate bracket from the 33 percent bracket because of retirement. By selling their relatively high-cost, actively managed mutual funds, he was able to take advantage of the zero percent capital gains rate while also getting them into lower cost index funds for the future, which typically generate lower capital gains distributions, he said.
Janet Kidd Stewart writes for the Chicago Tribune.