March 25, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
Jean and Larry in Delhi Township: What are some of your suggestions for how to lower our taxes in retirement?
Answer: Taxes can end up costing you a lot of money in retirement. But there are a few ways you can lower them now and into retirement.
Look at “withdrawal sequencing.” Various retirement and investment accounts have different tax implications. Depending on your financial situation, it may be more beneficial to take funds from certain accounts first. For example, it may make more sense to take money from your taxable investment accounts before your traditional 401(k)… but, on the other hand, a tax-free Roth account could supersede them all.
Your Social Security benefits can be taxed depending on your “combined income,” which includes any wages, investment income, pensions, IRA and 401(k) withdrawals, and rental property income you have in addition to your Social Security benefits. You could potentially reduce this tax by donating your Required Minimum Distribution (RMD) to charity once you turn 70 ½, and/or by converting your traditional IRA to a Roth IRA since Roth IRA withdrawals are not typically counted in your AGI (adjusted gross income). Before converting your traditional IRA to a Roth IRA, be sure to discuss the tax ramifications with your tax professional.
Also, don’t forget about property taxes. Check your jurisdiction's website for errors on your property value that may be inflating your taxes. This record is kept at your county auditor's office, but the website is the best place to check first before taking any action. For example, in Hamilton County, Ohio, this information can be found at the auditor’s website. If you do find errors in your appraisal and you can prove the errors, you may be able to get them adjusted without going through the appeal process.
The Simply Money Point is that the above examples are just a few of the ways to lower you tax bill in retirement. A trusted tax professional and financial planner can help you determine the best tax strategy based on your personal situation.
Tim from Mason: I just filed my 2017 taxes and realized my AGI was more than I was expecting. Any thoughts on how I can try lowering this for next year?
Answer: It’s great that you’re planning ahead to better understand your future tax implications. However, the new tax reform law will take effect when you file next year, so a lot of previous strategies are probably off the table.
For instance, there are a few deductions you won't be able to claim any more, such as moving expenses. So, if you plan to move for a job, you may have to do a little bit more salary negotiating to make the move worth your time. Tax preparation fees, job-related expenses, and home equity loan interest (for non-home-related costs) are also no longer deductible. Additionally, be aware of the change to medical deductions. Tax reform lowers the amount you can deduct from 10 percent of your adjusted gross income (AGI) to 7.5 percent of your AGI.
Plus, the standard deduction will be raised for 2018 ($12,000 for single filers and $24,000 for married couples filing jointly). This means if you itemized your deductions in previous years, you might not end up itemizing next year.
So, what can you still do to lower your taxable income for 2018? If you’re not already maxing out your traditional 401(k), this will help. So will contributing to a traditional IRA. If you have losses in any taxable investment accounts those can still be deducted. And assuming you’re still itemizing, charitable contributions are still allowed as well.
The Simply Money Point is that you need to make sure you’re not relying on old tax rules and deductions when planning for your 2018 taxes.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org.