Broker Check

Tax Strategies

Tax Strategies: Overview

As a retiree, you could receive tax-advantages if you meet certain requirements. Learning about and utilizing various tax credits, deductions, and exemptions will help lower your owed amount of income tax during retirement.

Taxation Basics

Income taxes will affect you the most as you prepare for retirement. As you enter the retirement process, you will receive tax-advantages that will lower the amount which you must pay. These lowered taxes will apply to all sources of income, including pensions, taxable retirement plans, and rental or business income. Social Security will continue to be taxed, but at significantly lower rates.

Tax Loss Harvesting

Tax-loss harvesting is a process by which investors sell stocks, mutual funds, and other investments at the end of each tax year. By selling, they incur loss to offset gains made in other investments. Selling these investments at a loss reduces your tax liability and defers income tax.

Several rules to tax-loss harvesting apply. The wash-sale rule states that a loss on a sale will not be allowed if the same investment or a similar one is purchased within 30 days. Because of certain rules and possibly severe investment losses if done incorrectly, you should consult with a financial advisor. Discuss if this is an advisable process for your current financial situation before attempting tax-loss harvesting.

Tax Preparer vs Tax Planner

Tax preparation services help tax-payers file their taxes and legally account for all finances. The purpose of a preparer is to ensure that all documents are filed under state and federal laws.

Tax planners, however, will help you optimize your tax circumstances. Their goal is to help you recognize and meet all of the advantages you could qualify for so that you don’t have to pay more than necessary.

Tax on Social Security

Social Security benefits are taxed based on provisional income. The Federal Government defines provisional income as:

  1. The sum of adjusted gross income for married couples or adjusted gross income for singles
  2. Any non-taxable interest
  3. Half of your combined Social Security benefits (50%)

After you have added up the above three factors to determine your combined income, you can use the chart below to see what portion of your Social Security benefits will get taxed.

Social Security Tax is levied by the federal government as a payroll tax or a self-employment tax, depending on your employment situation. It is a mandatory tax for employers and employees alike. The current tax rate, as of 2019, is 12.4% Social Security Taxes contribute to the Social Security Fund that provides for the elderly, disabled, and their survivors.

Tax on Your Retirement Accounts

Required Minimum Distribution (RMD)

RMD stands for Required Minimum Distribution. It is the amount that the government requires you to withdraw from your IRA account(s) each year in order to avoid harsh penalties. Your RMDs are taxed according to your retirement income tax bracket. To calculate your RMD amount, refer to the following guidelines:

  1. Determine the account’s balance on December 31st of last year.
  2. Locate the distribution factor listed on the calculation tables that corresponds to your age on your birthday from this year. Keep in mind that as you get older, your factor number will go down.
  3. Divide your account’s balance by the factor number. This will tell you your required minimum distribution amount.
AgeDistribution PeriodAgeDistribution PeriodAgeDistribution PeriodAgeDistribution Period
 72 25.68415.5968.11083.7
 73 24.78514.8977.61093.4
 74 23.88614.1987.11103.1
 75 22.98713.4996.71112.9
 7919.59110.81035.2115 and over1.9

Qualified Charitable Distribution (QCD)

QCD stands for Qualified Charitable Distribution. Individual retirement account owners can withdraw some of their account balance in a QCD and contribute it directly to a qualified charity. Doing so offers tax-advantages, but you must abide by several laws and meet several qualifications.

To qualify for a QCD, you must be 70 ½ years old at the time of distribution. You are not allowed to donate to a charity that will directly impact you in any form. Up to $100,000 can be distributed to multiple charities per year, but you may not exceed that limit. Roth IRA contributions are, in most cases, prohibited. All QCDs must come from accounts where the money would generally be taxed.

By making QCDs, you don’t just donate money for the benefit of others. You also lower the amount of money on which you can be taxed, reducing your overall federal taxes. Analyze your situation and see if you can qualify for QCD donations and tax-advantages.

Have a Question?

Thank you!