Year-End Tax Tips for Your Clients Who Are Retired

Tax Law and News Tax clients

Whether taking advantage of senior discounts at popular stores or enjoying happy hour specials with friends, retirees are astute at maximizing their money. As the end of the year is rapidly approaching, it’s also important for retirees to examine opportunities to reduce their tax bill.

Here are some of the best tax strategies for you and your retiree clients to consider:

  1. Tax Loss Harvesting: While best performed on a continuous basis, taxpayers should review all taxable brokerage accounts for securities that are currently in a loss position and consider selling them before the end of the year. This allows taxpayers to recognize the loss and offset other capital gains, and up to $3,000 of ordinary income. In order to maintain desired exposure to the market, you might advise your clients to purchase a replacement security, but ensure that it is not substantially identical to avoid the wash-sale rules.
  2. Qualified Charitable Distribution (QCD): Instead of giving cash, or even appreciated securities, the best way for retirees over 70 ½ to give to charity and reduce their tax bill may be to make a QCD from their IRA of up to $100,000. The amount of the QCD will count toward Required Minimum Distributions (RMDs) and not be included in income.
  3. 529 College Savings Plan Contributions: Retirees who intend to help pay for their grandchildren’s college should consider contributing to a 529 Plan this year. Many states offer an income tax deduction for using their state’s plan, and some allow you to use any plan and still receive the deduction. In addition, future distributions used for college are tax-free.
  4. Contribute to Retirement Plans: Any retiree who still has earned income from a part-time job should maximize contributions to an IRA or employer retirement plan. If self-employed with no other employees, consider a Solo 401(k) to maximize deductions. If one spouse is working, but the other is not, consider making a spousal IRA contribution for the non-working spouse. Contributing to retirement plans makes sense, even if you also must take RMDs in the same year.

While strategies that defer income and accelerate deductions noted above will be appealing to many, there are certain circumstances where the opposite strategy may actually reduce a retiree’s tax liability. In a progressive tax system such as ours, one of the best ways for retiree clients to minimize taxes is to smooth an income level from year to year. Therefore, in years where an income level is lower than “normal,” it may be advantageous to accelerate income into those years to fill up the lower brackets, in order to avoid being taxed at higher brackets in future years.

A prime scenario where retirees should consider accelerating income is when Social Security has been deferred and RMDs have not yet begun. These taxpayers are likely at their lowest level of taxable income that they will see for the remainder of their lives. Strategies, such as the two included below, will accelerate income into these years, increasing the tax liability with the intention that it will be taxed at a lower rate than it would be in the future.

  1. Roth Conversions: Many retirees have significant pre-tax assets in traditional IRAs. After turning 70 ½, these accounts will be subject to RMDs and greatly increase taxable income in those years. By converting a portion of those accounts into a Roth IRA, the retiree can accelerate income recognition into the current year, where they may pay tax at a lower rate. Furthermore, all future growth of the Roth IRA will be tax-free and not subject to RMDs.
  2. Capital Gain Harvesting: Another way to accelerate income is to review taxable brokerage accounts for securities in gain positions, consider selling these securities and then consider repurchasing them. This causes the gain to be recognized and resets the cost basis. The wash-sale rules do not apply to gain transactions, so your clients don’t need to worry about buying the same security back if they wish. Couples, married and filing jointly with taxable income up to $75,300, are subject to a 0 percent long-term capital gains rate, making this a no-lose proposition for those in that situation.

Working with you to implement these strategies, retirees can reduce their tax bill for both 2016 and years to come.

Editor’s note: Want more tips for retired clients? Check out the article “To Claim or Not to Claim: When Should Your Clients Take Social Security?

Comments (2) Leave your comment

  1. With regard to the QCD, the investment firm I asked about this said that the 1099-R would show Lines 1 & 2 (Taxable Income) as the same amount. What are the mechanics of removing the charitable contribution (up to $1,000) from taxable income on the Form 1040?

    1. You would include the full amount of the charitable distribution on the line for IRA distributions (Form 1040, Line 15a). On the line for the taxable amount (Form 1040, Line 15b), you would enter 0 and enter “QCD” next to it, if the full amount was a QCD. See IRS Publication 590-B for further information.

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