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

By Lisa Church

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

March 20, 2019 05:51 PM

This is the 4th part of a series of blogs on 12 Tax Tips for 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, 2, and 3 we covered the following topics to minimize the tax burden for 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

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

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

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

For the final part of this blog series we continue with the following tax tips for Retirees & the Elderlly.

9) Gift assets to family members

One way to support family members and minimize taxes is to gift appreciated assets to someone who does not pay as high a tax rate. You can gift appreciated assets up to $14K (individual), $28K (married filing joint) per year without incurring any gift tax. If the family member chooses to sell the asset the gains will be taxed at their lower tax rate.

Note: If you gift assets to family members, their basis in the asset is the same as YOUR basis so, if they sell it, they're going to owe tax on all your gain (but at their lower tax rate). However, If your family members instead inherit the assets (rather than get them as a gift) they get the higher stepped-up basis (fair market value at your death). So, if they don’t need the money now and you are going to be under the estate tax exclusion limit ($11.18Million for 2018) at death then it would be better for your family members to get the asset as an inheritance than as a gift. If you are going to be well over the estate tax exclusion limit it will likely be better for them to get the asset as a gift now than as an inheritance where the max/top tax estate tax rate is 40%.

As an example, if your estate value is under the estate tax exclusion limit ($11.18M) and you depreciated a $200K rental home down to zero and you gift it to your child then their basis in the asset is zero. When they sell the home, they pay taxes on the total sale price (because it is all gain). However, if they get the real estate as an inheritance then their basis in the home is the full market value of the home at your death. So, when they sell the home, they only pay tax on the on the difference between the market value when the sell it and the $200K market value at your death. In other words, they would have to pay taxes on an additional $200K if they got it as a gift than as an inheritance.

10) Keep expenses low to minimize withdrawals from taxable accounts

A general principle in the retirement years is, if you can keep your annual spending low, you will not have to withdraw as much from the taxable accounts which will lower your taxes. Look at your monthly budget and see what the biggest expenses are and brainstorm how to reduce them. For example, if a large monthly expense is your mortgage, see if you can pay it off so you don’t have to do withdrawals from the higher taxed accounts to pay the mortgage each month.

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

In general, employees pay more taxes than the self-employed because the self-employed pay taxes after business expenses where employees pay taxes on the higher before expense amounts. There are many tax benefits of investing in real estate (e.g., depreciation) to offset the income. There are many expenses the self employed can deduct from their business income. If you work a part time job as an employee (i.e., you are not 1099 self-employed), you do not have the same level of opportunity to reduce the taxes on your income.

12) Good news examples of tax benefits from aging

Some tax benefits from aging include:

* Bigger standard deduction (it is $1.25K higher than the deduction for those under age 65)

* Higher filing threshold (age >65) before you have to file a return

* Credit for elderly or disabled if age over 65 and low income

* Higher IRA contributions if age over 50 ($1K)

* Higher 401K contributions if age over 50 ($6K)

* Higher HSA contribution limits if age over 55 ($1K)

* No early withdrawal penalty on retirement accounts (age >59.5) (also, if you left your job at age >55, you can begin penalty-free 401K distributions on the job you recently left)

* Retirees age 70.5 or over who transfer IRA withdrawals directly to a qualified charity will not own income tax on the contribution

* Property tax breaks: Some states allow those over a certain age and below a certain income level to quality for property tax deferrals or exemptions

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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