Over 65? Things to Watch for This Tax Season

Filing your taxes can be daunting, but it can also be an opportunity to save money if you know where to look. If you are 65 years old or older, it’s important to focus on certain tax areas that can help you reduce your future income tax liability and Medicare expenses. Here are some tax areas to focus on this tax season:

Qualified Account (401k/403b, IRA, etc.) Distributions:

Retirement accounts can be a valuable tool for building wealth, but it’s important to be careful when withdrawing funds in retirement to avoid unnecessary taxes. A typical retiree relies on a combination of Social Security benefits, corporate pensions, and distributions from pre-tax retirement accounts (401ks, IRAs, etc.), after-tax retirement accounts (Roth IRAs), and after-tax brokerage accounts. Understanding the differences in how these accounts are taxed can help you optimize your distribution strategy and minimize tax liability.

For example, consider a retired married couple, both aged 65, who file their taxes jointly and use the standard tax deduction (SD). The SD for married couples over 65 is $30,700 for 2023. Let’s assume they receive $30,000 and $15,000 in Social Security benefits, respectively (gross), and they have $1 million in a rollover IRA, $200,000 in a Roth IRA, and $500,000 in a joint brokerage account. They need $95,000 gross from their portfolio for their lifestyle.

Consider this potential strategy:

To minimize their tax liability, they could distribute $75,151 from their pre-tax rollover IRA to fill the lowest possible tax bracket. In 2023, the 12% tax income bracket ends at $89,451. Therefore, $75,151 (distribution) + $45,000 (Social Security) – $30,700 (SD) = $89,451. The remaining $19,849 can be sourced from either the joint brokerage account, Roth IRA, or a combination of both, depending on their tax priorities.

One common mistake to avoid is taking a distribution solely from the rollover IRA, which would push the couple into a higher 22% tax bracket and result in unnecessary additional tax.

Medicare Part B Income Thresholds:

It’s important to be aware that your income can affect the price you pay for Medicare Part B and D premiums. Medicare uses a two-year lookback to determine whether you pay the base Part B premium of $164.90 for 2023 or incur a surcharge known as the Income-Related Monthly Adjusted Amount (IRMAA). It’s important to note that the IRMAA thresholds are based on your modified adjusted gross income (MAGI), which is your adjusted gross income plus any tax-exempt interest you earned. If your MAGI exceeds certain thresholds, you may incur a surcharge on top of the base Part B premium. The IRMAA ranges from an additional $65.90 to $472 per month per beneficiary, so it’s crucial to be mindful of your income today to avoid higher premiums in the future.

In conclusion, by focusing on these tax areas, you can potentially reduce your tax liability and Medicare expenses. Be sure to consult with a tax professional to develop a strategy that works best for you.

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certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.


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