Unlocking the Hidden Tax Benefits for Those Age 50 and Beyond

When you start thinking about taxes, it brings several emotions, none of them usually good. Yet, taxes are a part of life -- and even a part of death so you can't avoid them. There are, however, several strategies you can take advantage of if you are age 5o and over.

The time to start addressing your taxes was probably last week, but don't delay further. There is time to help minimize taxes for tax year 2022 and things you should do now for 2023.

Make Contributions to Qualified Retirement Accounts 

Traditional IRAs and Roth IRAs

Traditional IRA contributions are a great way to save money in a tax deferred account.  IRA contributions allowed for 2022 are the lessor of $6,000 (with an additional catch-up of $1,000 if age 50 or over) or your 2022 compensation. The IRS says you can make 2022 IRA contributions until April 18, 2023, so you still have time to make those contributions whether it be to a traditional IRA or a Roth IRA. Also note, a spouse with no compensation but filing jointly may be eligible to make traditional or Roth IRA contributions based on the other spouse’s compensation.

Many taxpayers can deduct traditional IRA contributions providing tax savings, but restrictions on deductible and allowed contributions may apply depending on the amount of your income and/or retirement plan participation through work. Be sure to check with your tax advisor. If you accidentally exceed an IRA contribution limit, you can correct the error by withdrawing excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account - IRA Year-End Reminders | Internal Revenue Service (irs.gov)

A Roth IRA is also a tax-advantaged account that can be a great way to save for retirement. Roth IRA contributions are made with after-tax income so if an allowed traditional IRA contribution will not be deductible for you, consider making a Roth IRA contribution instead. While no deduction is available for Roth IRA contributions, unlike traditional IRAs, typically withdrawals after reaching age 59 ½ are tax-free (some exceptions apply-consult your tax advisor). This means Roth IRAs can help you be more tax efficient in retirement and provide estate planning opportunities since inherited Roth IRAs are also tax free to the inheritor. 

For tax year 2023, the maximum contribution to a traditional or Roth IRA is $6,500 and the catch-up for age 50+ remains $1,000.

401(k)

While the opportunity to adjust 2022 payroll 401(k) contributions has passed, for 2023 an employee can contribute up to $22,500 (401(k) limit increases Internal Revenue Service (irs.gov))

Other contribution thresholds to be aware of for 401(k) plans follow:

• Anyone age 50 or over is eligible for an additional catch-up contribution of $7,500 for 2023 (2022 was $6,500) (How Do 401(k) Catch-Up Contributions Work? Iinvestopedia.com.)

• The general limit on total employer (such as matching contributions) and employee contributions for 2023 is $66,000 and $73,500 with catch-up for age 50+ (2022 was $61,000 and $67,000 with catch-up) Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits | Internal Revenue Service (irs.gov)

• The IRS adjusts retirement plan contribution limits annually for inflation.

Contributing to a 401(k) tax-deferred retirement plan may seem like it will take a significant amount from your biweekly paycheck, but in reality, it will be less than you think. 

For example, if you make $75,000 a year and you put 5% ($3750) of that into your 401(k), you will be contributing $144 (biweekly), but the effect on your take-home pay would be a reduction of only $110 (presuming 24% tax bracket) due to the tax savings! 

Pam Miller, an Illinois-based CPA and tax expert, says there are many benefits when you take advantage of deductible retirement contributions.

Maximizing deductible retirement contributions reduces taxes, grows investments, allows funds to earn more money tax-free, and may even reduce income enough to make other tax credits available that would not be otherwise, resulting in even more money in your pocket.

Miller reinforces the net out-of-pocket cost of retirement contributions is less than the contribution amount when considering the tax savings making contributions more affordable.

For example, an Illinois taxpayer in the federal 24% tax bracket (IL 4.95% tax rate) would only need an additional $711 to make a $1,000 contribution— the tax savings of $289 makes up the difference and would need to be paid anyway (in taxes) if the contribution is not made. Of course, she says the higher your tax bracket, the lower your net out-of-pocket cost and the more significant the tax savings.

A tax professional can guide you based on where you live and your individual situation. However, Miller recommends speaking with an expert before making significant tax and financial decisions.

The biggest mistake I see taxpayers make is seeking tax advice after making a significant financial transaction. A more tax-efficient option would often have been available with proactive tax advice.

Long-Term Care Insurance

If you have an LTC Insurance policy, the premiums may be partially or fully tax-deductible either as an itemized deduction (included in medical deductions) or as a deduction against adjusted gross income if you have self-employment income. 

• Long-Term Care Insurance Tax Deduction Limits Increase for 2023 - IRS Compare 2022 with 2023

Several states are considering following the State of Washington in implementing a payroll tax on those aged 18 and older unless they own a qualified Long-Term Care Insurance policy. While it is too late for 2022 to get a LTC policy in Washington, if your interest is to avoid a tax, it is not too late in the other states considering plans.

California and New York are expected to be the next states in line, with Illinois, Michigan, and Minnesota following them. Avoiding an additional payroll tax may not be the only reason to own an LTC Insurance policy since such policies help protect your savings and provide greater flexibility in care options by defraying long term care costs.

• Multiple States Considering Implementing Long-Term Care Tax

Required Minimum Distributions (RMDs) and Qualified Charitable Distributions (QCDs)

The SECURE Act 2.0 passed in December 2022 changed when required minimum distributions (RMDs) must begin. In 2022, individuals must begin RMDs if age 72 by year end (or can delay RMDs until April 1^st of the following year--consult your tax advisor to determine what is right for you).  Beginning in 2023 the age limit increases to 73 and then to 75 in 2033.

If you don't need the money, want to be generous in a tax efficient way, and are at least age 70 ½, you may make a qualified charitable distribution (QCD) from your taxable IRA by year end 2023. You can donate up to an overall maximum of $100,000 to a qualified charity as long as disbursed directly from your taxable IRA to the charity.  The QCD gets excluded from taxable income (meaning tax savings) and if you have RMDs also counts toward those RMDs--a win-win. Consult your tax adviser for proper tax return reporting and for details on the expansion of what is considered a qualified charity with the passing of SECURE Act 2.0.

Health Savings Accounts

A Health Savings Account (HSA) is a type of savings account designed for individuals with a high-deductible health insurance plan and used to pay for qualified medical expenses. 

If your employer provides a Health Savings Account (HSA), make sure to maximize its potential. The Internal Revenue Service (IRS) permits contributions to Health Savings Accounts from your pre-tax income, and if your employer makes contributions, those too are excluded from your gross income. 

Gains within the HSA are tax-deferred and if used for qualified medical expenses, remain tax-free. Qualified medical expenses include (but not limited to) insurance deductibles, prescriptions, and even Long-Term Care Insurance premiums which can be paid from the HSAs without incurring any taxes on those distributions.

For 2022 if you have self-only insurance coverage and are under 55 you can contribute $3650 (for 2023,  $3,850) or up to $7,300 (for 2023, $7,500) for family coverage. The catch-up contribution is an additional $1,000 if you reach 55 during the year for both 2022 and 2023. Remember your contribution limit is reduced by any amount you contributed through payroll or your employer contributed as a tax free benefit.  If your 2022 HSA contributions are not yet maximized, you still have time to contribute and receive a deduction for the difference yourself up until April 18, 2023.

Additionally, since the HSA is yours, those funds stay with you if you change jobs or retire. Don't confuse an HSA with a flexible spending account (FSA) which requires the money to be used yearly or lose it. HSA funds remain yours; yet another great opportunity to save taxes and have funds grow tax-deferred.

65 and Older? You Have a Bigger Standard Deduction

Good news if you are age 65 and older. Additional standard deductions are available to reduce your taxable income lowering your tax bill!

The standard deduction in 2022 for married couples filing jointly is $25,900 ($27,700 for 2023) and for single taxpayers and married individuals filing separately is $12,950 ($13,850 for 2023).

If you are 65 or older and file as a single taxpayer, you can take advantage of an additional $1,750 deduction for tax year 2022 ($1,850 for 2023). If you are married and filing jointly or separately, each taxpayer 65 or older has an additional standard deduction of $1,400 ($1,500 for 2023). For taxpayers who are both 65+ and blind, instead double these respective additional standard deductions.

For some taxpayers, however, standard deductions even with the additional allowed amounts may not be as beneficial as itemizing deductions.  If itemized deductions are higher than allowed standard deductions, itemizing deductions will provide greater tax savings.

If you're 65 or older and have a straightforward return, you can use Form 1040-SR for seniors. It has a larger font type easier to read for those who still file taxes by paper on their own and includes a chart showing the bigger standard deductions.

Don't Go It Alone

Getting expert help for tax planning can help ease stress and save money. A professional tax advisor can help you navigate complex rules and regulations to create a plan that works best for your financial situation. They can also provide guidance on how to make use of deductions, credits, and other strategies to reduce your tax liability. Plus, they are knowledgeable about the latest changes in the tax code, so you can take advantage of potential savings. 

Having an expert on your side can save time and energy on research and analysis. This will give you more time to focus on other areas of your life while ensuring that your finances are managed correctly and efficiently.

Tax laws and regulations can change, meaning staying up-to-date on the latest information is essential. Even for older, retired adults, professional tax advisors can help you understand the implications of these changes in tax laws and how they will impact you in retirement. An experienced tax advisor can help identify deductions or credits for which you may be eligible that could save you money no matter your age or economic situation.

Taxes, they stay with you your entire life and even after death. Be proactive in how you address taxes and how best to use the regulations to your advantage.