Wealth Column: Why everyone needs a tax strategy
Let us paint you a picture. You're 71 years old. You give money to your favorite charities every year, but still have to take the standard deduction, and you just began taking your required minimum distributions last year, which are thousands of dollars more than what you spend each year. That means you are also paying huge amounts of tax. And because you are taking lots of money that you don't need, you're also gifting sizeable portions of your income to your family members. And, you guessed it, you could be paying tax on that, too.
This could be you. Or, you could apply a tax strategy to your financial situation and keep much more of your hard earned money. Here are a few places you can start.
Use Roth conversions to help reduce tax
We have found that, in general, in the first few years of retirement your income will drop because you are no longer earning income and you are not yet taking Social Security or RMDs. This makes it a great time to consider converting a portion of your traditional IRAs or 401k into a Roth IRA. You'll have to pay tax on the amount you decide to convert, but depending on your income levels, that tax payment could be tens of thousands of dollars less than it would be when you start taking required minimum distributions.
If you're already taking required minimum distributions, consider using a Qualified Charitable Distribution to lower your tax burden.
This involves sending a portion, or all of, your required minimum distributions directly to a charity of your choosing, lowering your taxable income for the year.
Think about bunching your charitable contributions or using a QCD to get better tax savings
Giving money to charitable causes is a noble thing to do, and those of us who donate likely aren't doing so to gain financial benefit for ourselves. That being said, there are ways to give to your favorite charities and save on your tax bill at the same time. It's a win-win.
With the new standard deduction making it less likely for many Americans to see a real benefit from their charitable contributions, giving two years of contributions every other year could be a beneficial tax strategy. This could give you the ability to itemize in one year, seeing a tax deduction for your giving, and then taking the standard deduction the next year.
Give gifts only up to the annual exclusion amount per person, per year
When we have more than we need, it's only natural that you may want to give some of that to your loved ones. But the government will only allow you to gift up to $15,000 annually before you have to file a gift tax return. If you want to give your children or grandchildren more than that without the hassle, there are some tax-smart options. For example, if you want to give your daughter and son-in- law $25,000, make sure you split that money between the two of them so you stay under the $15,000 per person limit.
If you're gifting to loved ones to help cover medical expenses or the costs of tuition, you can avoid the gift tax by paying the medical or educational institution directly.
These are only a few ways you can save on taxes by incorporating a tax strategy into your life. For more ways to cut down on your tax bill, both now and later, we suggest reaching out to a tax specialist to discuss your unique financial situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.