As a retiree, I've learned that I have additional opportunities to minimize our tax responsibility. I gladly use those opportunities to send less of our hard earned money to the wasteful federal and state governments. These strategies simply require the capability to shift income and deductions. By doing so, a retiree can reduce his overall tax responsibility over a two year period.
There are three elements that impact our tax responsibility: income, deductions and credits.
- Credits. Credits are the best way to reduce taxes since they are a direct offset of tax responsibility. So a $1000 credit reduces tax responsibility by $1000. The tax credits for which we may be eligible are the Saver's credit ($2000 max) and the Child Tax credit ($1000 per child). Both credits go to zero above certain income thresholds.
- Deductions. Deductions reduce taxable income. Sometimes a challenge for retirees is having sufficient deductions to exceed the standard deduction, especially when there is no mortgage deduction. A solution is to shift deductions to one year and take the standard deduction in the other year. For example, an option is to pay two years of property taxes and shift contributions into one year to exceed the standard deduction. Then take standard deduction in the other year. In this example, the total deductions for two years will be greater than two times the standard deduction.
- Income. Depending on the source of income, the capability to manage income received will vary. Retirees that receive pension payments or regular dividend/interest income probably can't adjust income as easily. However, those with stock, capital gains and IRA distribution income may be able to choose when to take taxable income. By managing when to take taxable income, a retiree may be able minimize the part of the funds that are taxable.
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This is not financial, retirement or tax advice. Please consult a professional advisor.
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