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Many retirees may face higher taxes this year (and next), but there’s still time to make strategic moves.
what happened?
First, seniors’ budgets could take another hit this tax season — a federal income tax bill on a portion of their Social Security benefits.
Social Security recipients received a high cost-of-living adjustment (COLA) of 8.7% in 2023. This was an average increase of $140 per month. This additional inflatation could cause benefits to exceed the taxable income threshold.
We’re all happy to see our retirement and non-retirement investment account balances increase last year, but that means your income taxes could be higher in 2023 and 2024. To do.
This has been a very good year for retirees investing, with subdued inflation, a strong job market and an attractive future with low interest rates. The S&P 500 ended the year up more than 24%. The Dow Jones Industrial Average rose more than 13%, and the Nasdaq rose 43%.
But before you start playing around with your account statements, remember that not all of those profits will be yours.
“You need to be aware of the tax risks in non-retirement accounts like stocks and mutual funds,” Jeffrey Melone, executive wealth management advisor at TIAA, told Yahoo Finance. “Dividends and capital gains from these investments come with tax liability. Most people are concerned about the rate of return, which of course is important, but knowing how much of that return you can keep. That is more important.”
Here are three basic and effective ways to reduce your tax liability on your 2023 return.
Complete coverage: 2024 Taxes — Everything You Need to File Your Taxes on Time
Contribute to an IRA
Placing money in a personal retirement account reduces your taxable income, which may result in lower taxes.
“Many of my retired clients and their spouses take on part-time jobs or consulting jobs to keep themselves busy,” Melone said. “Although most of these part-time jobs don’t offer 401(k) or retirement benefits, you may still be eligible to make IRA contributions, which will lower your gross income on your tax return. I can.”
The annual contribution limit to an IRA for tax year 2023 is $6,500. The IRA catch-up contribution limit for individuals age 50 and older is $1,000. Tax-deductible donations for 2023 must be made by April 15th.
read more: These are the new traditional IRA and Roth IRA limits for 2024.
Contribute to your HSA account
Generally, you can continue to contribute to a health savings account (HSA) as long as you are not already enrolled in Medicare and are covered by a high-deductible health plan.
These accounts aren’t a replacement for traditional retirement accounts, but with higher contribution limits, you can get a 3x tax benefit and boost your retirement savings. This is the only account that allows you to deposit funds on a tax-free basis, accumulate tax-free, and withdraw funds tax-free for qualified medical expenses.
If you fit these criteria, consider contributing to an HSA in the 2023 tax year, Madison Sharik, a certified financial planner in Pittsburgh, tells Yahoo Finance.
You can contribute up to $3,850 to your HSA for your own coverage only. People 55 and older can donate an additional $1,000 to her. Like an IRA, you can contribute to an HSA until the April 15 tax deadline.
“The good news is that HSA contributions are tax deductible even for high-income earners,” Sharik said.
read more: HSA contribution limits for 2023 and 2024: Here’s how much you can save
Take the extra standard deduction — or itemize it if it helps
Sharik pointed out that one of the most common causes of itemized expenses above the standard deduction for retirees is unreimbursed medical expenses.
“See if you have the opportunity to itemize expenses above the standard deduction on your tax return, especially medical expenses,” Sharik said.
The standard deduction for tax year 2023 is $27,700 for married couples filing jointly ($13,500 for single filers), so any itemized deductions in excess of this amount may provide tax benefits. You can get it.
“However, with medical expense deductions, you have to exceed a certain threshold to receive benefits,” says John A. Henderson III, a financial planner at Bailey Wealth Advisors in Silver Spring, Maryland. told Yahoo Finance. “If you spend an unusual amount of time in the hospital or have more medical events than usual, you may be able to deduct qualified unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. there is.”
If you’re 65 or older, single or filing as head of household, you can save a little more on your 2023 taxes by taking the $1,850 additional standard deduction. For married couples filing jointly or separately, the additional standard deduction is her $1,500 per qualifying individual. For filers age 65 and older, an additional standard deduction is taken in addition to the regular standard deduction for a given tax year.
If you’re 65 or older, visually impaired, and filing as single or head of household, your additional standard deduction is $3,700. If a married person files jointly or separately, she is $3,000 per eligible individual.
“These may not be huge benefits, but they may allow you to keep more money in your pocket,” Henderson said.
Kelly Hannon is a senior columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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