The tax deadline has come on and gone, but not to put too fine a point on it, tax issues, to one degree or another, never really go away—ever– whether or not you’re retired. There are, however, definite ways for retirees to minimize their tax liability, as outlined by Joe Udo in a smart usnews.com piece. Here are some of his suggestions:
“Reduce your expenses. How can reducing your expenses help with your taxes? If you don’t spend a lot of money every month, you won’t have to withdraw as much from your retirement fund. By keeping your expenses moderate, you will be able to stay under the 15 percent tax bracket and take advantage of many tax breaks. For married couples filing jointly, that’s $73,800 after your deductions and personal exemptions in 2014.
“Pay off your mortgage before retiring. One way to minimize your monthly expenses is to pay off your mortgage before retirement. Your mortgage is usually your biggest monthly bill, and if you can get rid of that, you’ll have much more flexibility in retirement. It’s too bad that more and more people are carrying a mortgage into retirement. It’s more difficult to minimize tax if you need to withdraw a large amount to pay the monthly mortgage.
“Minimize tax on your Social Security benefit. Did you know that your Social Security income is taxed based on your combined income? (Combined income is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.) If you file as married jointly and your combined income is below $32,000, you won’t have to pay any tax on your Social Security benefit. But as your income increases, you will pay more and more tax on your Social Security benefit. This is another reason to keep your retirement expenses low: It will help you minimize tax on your Social Security benefit.
“Dividend income and long-term capital gains. Qualified dividend income is taxed at zero percent, 15 percent or 20 percent depending on your tax bracket. If you can stay under the 15 percent tax bracket, your dividend income won’t be taxed. Long-term capital gains are also taxed at the same rate as dividends.
“Roth IRA and Roth 401(k). Your retirement funds in a Roth IRA or Roth 401(k) won’t be taxed if your withdrawals are qualified. Generally, if you are over 59½ and the contributions were made more than five years ago, the withdrawal will be qualified. Check the IRS rule or talk with your tax advisor to make sure. Roth accounts are a great way to diversify your post-retirement income, so we all need to invest in these accounts.
“Traditional IRA and 401(k) distributions. Withdrawals from your traditional IRA (deductible) and 401(k) are fully taxable. These retirement accounts helped lower your tax bill in your working years, but they will increase your tax liability once you start taking distributions. “