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Retirees Have to Pay Taxes, Too. 6 Smart Ways to Reduce Them


retirement taxes
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Many people think that retirement means escaping from the burden of taxes. Unfortunately, that's not the case. Retirees have to pay taxes on various sources of income, such as pensions, Social Security, and investments. Depending on your income level and where you live, you may also have to pay state and local taxes.


However, there are some smart ways to reduce your tax bill and keep more of your hard-earned money. In this article, we will share six strategies that can help you lower your taxes in retirement and enjoy more financial freedom.


1. Choose the right state to retire in


One of the biggest factors that affect your taxes in retirement is where you live. Some states have no income tax, while others have high rates and may tax your Social Security benefits, pensions, and other retirement income. Additionally, some states have high property taxes and sales taxes that can eat into your budget.


Therefore, it's important to do some research and compare the tax situation of different states before you decide where to retire. You may want to consider moving to a state that has low or no income tax, such as Florida, Texas, or Nevada. Alternatively, you may want to stay in a state that offers generous tax breaks for retirees, such as Pennsylvania, Georgia, or South Carolina.


Of course, taxes are not the only factor to consider when choosing a retirement destination. You should also think about the cost of living, the quality of life, the climate, the health care options, and the proximity to your family and friends.


2. Plan your withdrawals wisely


Another way to reduce your taxes in retirement is to plan your withdrawals from your retirement accounts wisely. Different types of accounts have different tax implications, so you need to be strategic about when and how much you withdraw from each one.


For example, if you have a traditional IRA or 401(k), you will have to pay income tax on your withdrawals at your ordinary tax rate. However, if you have a Roth IRA or Roth 401(k), you can withdraw your money tax-free, as long as you meet certain rules. Therefore, it may make sense to withdraw from your Roth accounts first and leave your traditional accounts for later.


However, there is one caveat: you have to start taking required minimum distributions (RMDs) from your traditional IRA and 401(k) when you turn 72 (or 70.5 if you were born before July 1, 1949). These are the minimum amounts that you have to withdraw from these accounts each year, based on your life expectancy and account balance. If you fail to take your RMDs on time, you will face a hefty penalty of 50% of the amount that you should have withdrawn.


Therefore, you may want to start withdrawing from your traditional accounts before you reach the RMD age, so that you can reduce the size of your RMDs and lower your taxable income. Alternatively, you may want to convert some of your traditional accounts to Roth accounts before you retire, so that you can avoid RMDs altogether. However, keep in mind that converting will trigger a tax bill in the year of conversion, so you need to weigh the pros and cons carefully.


3. Maximize your deductions and credits


Even if you have a low income in retirement, you may still qualify for some deductions and credits that can lower your tax bill. For example:


- You can deduct up to $10,000 ($5,000 if married filing separately) of state and local taxes (SALT), including property taxes and income or sales taxes.

- You can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI).

- You can deduct charitable contributions if you itemize your deductions.

- You can claim a credit for up to 50% of the first $2,000 ($4,000 if married filing jointly) that you contribute to a qualified retirement plan or IRA.

- You can claim a credit for up to $7,500 for buying an electric vehicle.

- You can claim a credit for up to $500 for making energy-efficient improvements to your home.


To take advantage of these deductions and credits, you need to keep track of your expenses and receipts throughout the year and file them with your tax return. You may also want to consult a tax professional who can help you find more ways to save on taxes.


4. Delay or minimize your Social Security benefits


Social Security benefits are a major source of income for many retirees, but they are also subject to taxes. Depending on your income level, you may have to pay income tax on up to 85% of your benefits.


To determine how much of your benefits are taxable, you need to calculate your provisional income, which is your AGI plus half of your Social Security benefits plus any tax-exempt interest. If your provisional income exceeds a certain threshold, you will have to pay tax on a portion of your benefits. The thresholds are:


- $25,000 for single filers

- $32,000 for married couples filing jointly

- $0 for married couples filing separately


To reduce or avoid taxes on your Social Security benefits, you may want to delay or minimize your benefits. For example:


- You can delay claiming your benefits until you reach your full retirement age (FRA) or later, which will increase the amount of your monthly benefit and reduce the percentage that is taxable.

- You can work part-time or start a side hustle in retirement, which will provide you with additional income and reduce your reliance on Social Security.

- You can withdraw more from your Roth accounts and less from your traditional accounts, which will lower your AGI and provisional income.

- You can invest in tax-exempt bonds or municipal funds, which will provide you with tax-free interest income.


5. Use the QCD strategy


If you are 70.5 or older and have a traditional IRA, you can use the qualified charitable distribution (QCD) strategy to reduce your taxes and support a good cause. A QCD is a direct transfer of funds from your IRA to a qualified charity, up to $100,000 per year. The QCD amount is not included in your taxable income and counts toward your RMD for the year.


The QCD strategy has several benefits:


- It lowers your AGI and provisional income, which may reduce your taxes on your Social Security benefits and Medicare premiums.

- It allows you to take the standard deduction and still benefit from charitable giving.

- It reduces the size of your IRA and future RMDs, which may lower your taxes in the long run.


To make a QCD, you need to contact your IRA custodian and request a direct transfer of funds to the charity of your choice. You also need to obtain a written acknowledgment from the charity and report the QCD on your tax return.


6. Hire a professional tax advisor


The last but not the least way to reduce your taxes in retirement is to hire a professional tax advisor who can help you plan and optimize your tax situation. A tax advisor can:


- Help you choose the best state to retire in based on your income and preferences.

- Help you plan your withdrawals from your retirement accounts and optimize your asset allocation.

- Help you find and claim all the deductions and credits that you are eligible for.

- Help you decide when and how much to claim your Social Security benefits and how to minimize taxes on them.

- Help you implement the QCD strategy or other charitable giving strategies.

- Help you prepare and file your tax returns accurately and on time.


Hiring a tax advisor may cost you some money upfront, but it can save you a lot more money in the long run by reducing your taxes and avoiding penalties. Moreover, it can give you peace of mind and confidence that you are making the best decisions for your financial future.


Conclusion


Retirement is supposed to be a time of relaxation and enjoyment, but taxes can put a damper on that. However, by following these six smart ways to reduce your taxes in retirement, you can keep more of your money and live the lifestyle that you deserve.


If you need more help with planning your taxes in retirement, we have good news for you. Akkish Inc is a leading financial consulting company that specializes in helping retirees achieve their financial goals. We can help you create a personalized tax plan that suits your needs and preferences.


As a special offer for our readers, we are giving away a FREE consultation and a $5 gift card if you sign up today. All you have to do is visit our website at https://www.akkish.com and fill out a simple form. Don't miss this opportunity to get expert advice and save money on taxes. Sign up now!


Keywords: taxes, retirement, income, deductions, credits, Social Security, IRA, 401(k), Roth, QCD



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