September 16, 2019 | Tax Planning
With a median age of 44.6 years, Maine is the oldest state in the country. Our population of people age 65 or older has also grown by over 55,000 in the past seven years. If you’re part of Maine’s large senior population, you should be aware of some age-based tax breaks that you may be entitled to.
Here are the details.
Catch-Up Contributions to Retirement Accounts
The IRS allows taxpayers 50 and older to make “catch-up” contributions each year to certain types of tax-favored retirement accounts. While the name implies that these contributions are for those who got a late start to saving for retirement, people who have regularly contributed to their retirement accounts over the years can take advantage of them too. For the 2019 tax year, the maximum catch-up contributions are:
- $1,000 for traditional and Roth IRAs
- $6,000 for 401(k), 403(b) and 457 plans
It’s important to note these maximums are in addition to the existing maximum contribution limits currently in place. For example, in 2019 the maximum you can put in a Roth IRA is $6,000. But if you are 50 or over, you can contribute $7,000 ($6,000 contribution limit plus $1,000 catch up contribution).
Catch-up Contributions Add Up
Many people over 50 fail to make catch-up contributions because they may not realize what a significant impact it could make in their retirement-age wealth.
For example, assume you are 50 years old and begin putting an extra $1,000 into your IRA each year until you turn 65. Assuming a 4% annual return and rounding to the nearest $1,000, you would have added approximately $22,000 extra to your retirement-age wealth ($16,000 of catch-up contributions + approximately $6,000 of earnings).
Important: Making larger deductible contributions to a traditional IRA can also lower your tax bills. Making additional Roth IRA contributions won’t, but you’ll be able to take more tax-free withdrawals later in life.
Roth IRA Conversions
If you expect to be in the same or higher tax bracket in future years, you may want to consider converting your traditional IRA to a Roth IRA. While there are tax implications in doing so, it may be a small price to pay for avoiding a potentially higher federal income tax on the account’s future earnings.
Roth conversions are also popular among seniors because they don’t have annual required minimum distributions (RMDs). An RMD is the amount you’re legally required to withdraw from your qualified retirement plans and IRAs after reaching age 70½. So whether you need to or not, you’ll have to tap into your retirement assets at that age — and pay taxes on them.
By converting to a Roth IRA, you can keep your balances in the market to potentially earn more income and tax-free dollars. You can also leave Roth IRAs to your heirs, and they can benefit from income-tax-free dollars earned after your death.
There’s no income limit imposed on Roth conversions, and at Filler, we can help you evaluate the pros and cons of a Roth conversion.
Charitable Donations from IRAs
If you’re age 70½ or older, you can donate $100,000 directly from your IRA to IRS-approved charities. These direct donations are called qualified charitable distributions (QCDs).
While QCDs don’t directly affect your tax bill, they do count towards the required minimum distribution (RMD) rules that apply to traditional IRAs after age 70½.
If you haven’t yet taken your 2019 RMDs and are planning to make charitable donations, consider making tax-free QCDs instead of taxable RMDs. That way you can meet your 2019 RMD obligation, avoid paying taxes on it and meet your charitable goals at the same time.
Gifts of Appreciated Assets
Older individuals who own taxable investments that have appreciated in value are subject to the maximum federal income tax rate on long-term capital gains — 20% plus the 3.8% net investment income tax (NIIT) that applies at higher income levels.
If you want to avoid a capital gains tax hit, you may want to gift these investments to loved ones in lower tax brackets. This allows you to share your wealth and helps the recipient pay less taxes that you would if you just sold the shares.
If you have taxable investments that have lost value since you purchased them, consider selling them and claiming the resulting tax-saving capital loss for yourself. Then, if you want, give the proceeds to your relative.
Medical Expense Deductions
If you’re 65 or older, you may have fallen into the habit of automatically claiming the standard deduction instead of itemizing. And while doing so may be the right way to go, that’s not always the case.
Because older individuals often incur significant medical costs, it may be worth itemizing them if they exceed 10% of your adjusted gross income (AGI). AGI includes all taxable income items and certain write-offs such as deductible IRA contributions.
Medical expenses that qualify for itemized deduction include insurance co-payments, deductibles, dental visits, eye exams, wheelchairs, glasses and other out-of-pocket medical costs.
Medicare insurance premiums also qualify for for itemized deductions, specifically, premiums for Medicare Parts A, B, C, and D, as well as premiums for Medigap coverage.
Premiums for qualified long-term care (LTC) insurance also count. For 2019, they’re subject to the following age-based limits:
- $420 for those 40 or under
- $790 for those age 41 to 50
- $1,580 for those 51 to 60
- $4,220 for those 61 to 70
- $5,270 for those over 70
If you (and your spouse) have enough medical expenses to exceed the 10%-of-AGI threshold, you’ll need to consider itemizable expenses that you’ll have incurred by year end, such as:
- State and local income and property taxes (or state and local general sales taxes if you do choose to claim them instead of state and local income taxes)
- Qualified residence interest on a first or second home
- Charitable donations
Add all your itemizable expenses see if the total exceeds the applicable standard deduction amount. 2019 standard deduction amounts are as follows:
- $13,850, if you’re unmarried and you’ll be 65 or older at year end
- $12,200, if you’re unmarried and you’ll be under 65 at year end
- $27,000, if you file jointly and both spouses will be 65 or older at year end
- $25,700, if you file jointly and one spouse will be under 65 at year end
- $24,400, if you file jointly and you’ll both be under 65 at year end
- $20,000, if you use head-of-household filing status and you’ll be 65 or older at year end
- $18,350 if you use head-of-household filing status and you’ll be under 65 at year end
If your total itemized deductions exceed your allowable standard deduction, you should itemize deductions on your 2019 federal income tax return.
Let’s Discuss Your Options
Growing older has countless benefits, and one of them is some possible tax savings. Get in touch with us at Filler to discuss these strategies and other ideas that can help you save on taxes.