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Severn, MD: 12 Tax Tips for Retirees & Elderly (Part 3 of 4)

By Lisa Church

Services for Real Estate Pros with Lisa D Church CPA, EA, MBA, NTPI Fellow

March 17, 2019 07:53 PM

This is part 3 of a series of blogs on tax tips for the retirees and the elderly. Retirement can be a huge shock when retirees have to pay a significant tax due to retirement withdrawals and social security. Other than Roth IRAs, the money you withdraw from your retirement savings is most likely subject to ordinary income tax.

In parts 1 and 2 we covered the following topics to minimize the tax burden for elderly and retirees.

1) Prepare to be taxed and pay taxes on your investment withdrawals during the year

2) Open a Health Savings Account

3) Choose tax free investments like municipal bonds

4) Maximize medical expenses and other deductions by bunching

5) Minimize Social Security taxes

For part 3 of this blog series we continue with the following tax tips for the elderly and retired.

6) Sell assets that have an investment loss to offset the tax on investment gains and other income

If you sell an asset that has an investment loss, then you don’t have to pay taxes on the sale. You can use that money for retirement expenses and not pay taxes on it.

If you sell an asset that has an investment gain, then you have to pay taxes on the gain. The investment losses can reduce or offset the taxes on the investment gains if you sell/withdraw them in the same taxable year. There are limits as losses are first used to offset gains of the same time. For example, short term losses are first deducted from short term gains, long term losses are first deducted from long term gains, and then net losses of either type can be deducted against the other gain type. An example of using a loss to offset a gains is if you sold a stock fund where you made a $30K profit and sold another one than had a $20K loss then you would only have to pay taxes on $10K of gain (which is better than paying tax on the $30K of gain).

If the losses on the assets you sell exceed your gains, you can deduct the difference against other types of income on your return up to $3K/year ($1.5K for married filling separate).

7) Defer selling your home until you meet the use test, until your income is low, or do a 1031

If you are selling your home to move to different housing for your retirement, you don’t have to pay capital gains tax on the sale of your home if you have lived in your home as your primary residence for 2 out of the 5 years immediately preceding the date of the sale. You can exclude gains up to $250K if you are single and up to $500K if you are married.

Selling your home when your income is low means any taxes that must be paid will be paid at the lower income tax rate.

You can also do a 1031 exchange to defer capital gain taxes. If you select a retirement home and buy it within 180 days of the day you sell your home, you can do a 1031 exchange and defer the taxes on the capital gains of the sold home.

8) Defer sales of assets (e.g., stocks, bonds, real estate, collectibles, businesses) until they are taxed at the lower long-term capital gains rate

Capital gains are profits from the sale of an asset such as stocks, bonds, real estate, collectibles, or businesses. The taxes on those profits are taxed at either the higher short-term capital gains rate or at the lower long-term capital gains rate. Long term capital gains (like qualified dividends) are taxed at rates that are 10% or more lower (0%, 15%, or 20% depending on your income) than short term capital gains which are taxed at your ordinary income rate. You pay the higher short-term capital gains tax if you sell an asset that you held for less than one year. You pay the lower long-term capital gains tax if you sell the asset after you have held it for more than 1 year.

So, defer the sale of assets (e.g., stocks, bonds, real estate, businesses) until you have held them for at least 1 year to pay the lower tax rate on the gain.

The following tax tips for retirees and elderly will be covered in part 4 of this blog series.

9) Gift assets to family members

10) Keep expenses low to minimize withdrawals from taxable accounts

11) If you want to keep working in retirement, run a small business and/or invest in real estate

12) Good news examples of tax benefits from aging

The IRS Tax Guide for seniors can be very helpful. It is located at:

https://www.irs.gov/pub/irs-prior/p554--2018.pdf

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