Tax Planning for RETIREES

Transcription

1 Tax Planning for RETIREES

2 2018 tax planning amounts to getting records together and deciding on who will do your taxes.

3 The records you will need are all your tax documents including: W2 s, 1099 s, brokerage statements, quarterly payments, and records of self employment income and expenses, etc

4 If you are going to itemize or see if you should itemize, you ll need: medical expense records, charitable giving records, property taxes receipts, mortgage interest info, gambling losses. But if you are over 65 you will need these to exceed $13600 if Single $19600 if Head of Household $25300 if Married filing jointly or $26600 if both over 65.

5 Who will be doing the taxes? Yourself: Many choices: Software like Turbo tax or Taxact, free filing on line, paper forms,etc An Accounting firm or H&R Block, Liberty, etc AARP Taxaide: Free, Meets here in the library. Hours TBD, but will include MW 9-4.

6 Tax Planning for 2019 Most beneficial time to do planning that will reduce taxes is the period from retirement to age 70. After that most people have some required income paths that limit their options on how to take their income. Social Security and Required Minimum Distributions from IRA s, 401k s etc., and maybe other retirement plans.

7 Before reaching 70 you need to make decisions about which accounts to draw money from in order to minimize taxes now and later. Do you start Social Security? Pay off home? Draw on IRA? Start withdrawing from and annuity?

8 Types of income in Retirement Part-time income: wages or self employment income Social Security Defined benefit retirement Interest (Taxable and Tax exempt) Dividends (Qualified and non Qualified) Capital Gains (Short term and Long term) Withdrawals from Retirement Accounts Savings or sales of property Annuities

9 Two tax breaks for old people. 1.Increase in the standard deduction by $1,600 for single and head of household filers and $1,300 per person for Married filers who are over the age of Qualified Charitable Distributions ( QCD) for filers over the age of 70.5 when paid directly from an IRA.

10 To reduce the your income tax you need to reduce your taxable income or structure your income so that you avoid the higher tax rates. Also your income level determines the percentage of your social security that will be taxed and your medicare premiums.

11 Definition of terms: Adjusted gross income: Wages, interest, dividends, cap gains, retirement income, self employment income, taxable SS, gambling winnings, minus a few adjustments. Modified Adjusted gross income: Adjusted gross income with the adjustments, non taxable portion of SS and tax exempt interest added in. Taxable income: AGI minus itemized deductions or standard deduction.

12 Married Filing Jointly Taxable Income Ordinary Income Tax bracket Long-term capital gains rate Up to $19,050 10% 0% $19,050 to $77,201 12% 0% $77,201 to $77,400 12% 15% $77,400 to $165,000 22% 15% $165,001 to $315,000 24% 15% $315,001 to $400,000 32% 15% $400,001 to $479,000 35% 15% $479,001 to $600,000 35% 20% $600,001 and over 37% 20%

13 Tax rates single Taxable Income Ordinary Income Tax bracket Long-term capital gains rate Up to $9,525 10% 0% $9,526 to $38,600 12% 0% $38,602 to $38,700 12% 15% $38,701 to $82,500 22% 15% $82,501 to $157,500 24% 15% $157,501 to $200,000 32% 15% $200,001 to $425,800 35% 15% $$425,801 to $500,000 35% 20% $500,001 and over 37% 20%

14 Planning for 2019 and beyond: US NEWS: 7 ways to minimize tax Reduce your expenses. Pay off your mortgage before retiring. Minimize tax on your Social Security benefit. Dividend income and long-term capital gains Roth IRA and Roth 401(k). Traditional IRA and 401(k) distributions. Diversify your after-retirement income.

15 Example: Joe and Eva are married and want to pay off the $160,000 mortgage on their home and take a $20,000 cruise after they retire on Jan. 1 at age of 65. They estimate their living expenses for the year to be $40,000. He will receive $20,000 from a defined benefit plan and instead of starting SS he decides to pay for this by sell property for $200,000 of which $83,600 is capital gains. How much tax does he pay?

16 Joe and Eva s taxes using capital gains TOTAL INCOME $103,600 ADJUSTED GROSS INCOME $103,600 DEDUCTIONS $26,600 TAXABLE INCOME $77,000 TAX 0

17 Example on decision between an IRA and ss. Ed and his wife Lyn both 67 need $75,000 to live on and only have the $35,000 income from a defined benefit plan. He needs to decide to start SS or draw on his $1,000,000 regular IRA. Their SS would pay $40,000.

18 Using Social Security Ed and Lyn RETIREMENT INCOME $35,000 SOCIAL SECURITY 40,000 $ 15,350 ADJUSTED GROSS INCOME $50,350 DEDUCTIONS $26,600 TAXABLE INCOME $23,750 TAX $2,472 Using IRA RETIREMENT INCOME $75,000 SOCIAL SECURITY 0 ADJUSTED GROSS INCOME $75,000 DEDUCTIONS $26,600 TAXABLE INCOME $48,400 TAX $5,430

19 Using Social Security and rolling $35,000 into a Roth IRA Ed and Lyn with a Roth roll over RETIREMENT INCOME $70,000 SOCIAL SECURITY 40,000 $ 34,000 ADJUSTED GROSS INCOME $103,000 DEDUCTIONS $26,600 TAXABLE INCOME 77,400 TAX $8,913 Using IRA and rolling $29,000 into a Roth IRA RETIREMENT INCOME $104,000 SOCIAL SECURITY 0 ADJUSTED GROSS INCOME $104,000 DEDUCTIONS $26,600 TAXABLE INCOME $77,400 TAX $8,913

20 Example from Fidelity concerning taking money from one account at a time vs taking money from all accounts simultaneously. Joe is 62 and single. He has $200,000 in CD s and cash accounts, $250,000 in traditional 401(k) accounts and IRAs, and $50,000 in a Roth IRA. He receives $25,000 per year in Social Security and has a total after-tax income need of $60,000 per year. Let's assume a 5% annual return.

21 If Joe starts taking his $35,000 per year from his cash he will pay no tax for 7 years. He will then start taking money from his 401K s and IRA s. During the next 8 years he will pay $74,000 in taxes. He will finish by taking money from his Roth IRA and thus pay no tax. This will last him through year 22.

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23 If Joe takes money proportionally from the 3 accounts then his money will last 23 years and he will only pay $46,000 in taxes even though he will have had to pay taxes every year. This is a savings of $28,000 in taxes or about 40%.

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25 Medicare premiums based on 2017 MAGI Individual Married filing jointly Medicare Premiums/Month < $85,000 <$170,000 $ $85,001-$107,000 $170, ,000 $ $107,001 -$133,500 $234,001-$267,000 $ $133,501-$160,000 $267,001-$414,999 $ $160,001-$499,999 $320, ,999 $433.40

26 If you are a married couple with MAGI of $165,000. Since you son will inherit your IRA and he needs some money now. You know you can give gift him $20,000 with no gift tax so take out $20,000 out of the IRA to give to him. Besides income tax of $4,800 this year, in 2021 your medicare premiums will increase $54.10 each. So your medicare cost of 2021 will increase $

27 Example to show the use of QCD s You have taxable income of $47,000, an RMD of $30,000 and SS of $40,000. You also have medical deductions of $14,180, Sales tax of $1483 and property tax of $1000, Paid $12,000 interest on your home and Misc. gifts to charity of $1000 and a $10,000 donation to a 501c3.

28 1040 using no QCD.

29 Schedule A with no QCD

30 OK 511 not using QCD

31 1040 with QCD

32 Schedule A with QCD

33 OK with QCD Total tax with QCD = 10,811 Total tax with out QCD = 11,221

34 Oklahoma - Married Filing Jointly Tax Brackets Oklahoma - Single Tax Brackets Tax Bracket Tax Rate Tax Bracket Tax Rate $ % $2, % $5, % $7, % $9, % $12, % $ % $1, % $2, % $3, % $4, % $7, % Standard deductions: Single, $6350. HH, $9350, MFJ, $12,700