Tax Tips For Seniors: Act Now To Lower Your 2020 Tax Bill

April 15, 2020 will be here sooner than you think, so start getting ready now.  Most people don’t start thinking about taxes until sometime after Valentine’s Day. By then, however, it’s too late to take advantage of some tax strategies that expire at the end of this year.

Here are some options to consider. But remember: always consult with your retirement planner before making any changes to your financial or retirement strategy.

Charitable Donations: Plan Your Giving Carefully

Approximately 1/3 of total annual giving occurs in December – from both a generous holiday spirit and the incentive to increase tax deductions.

In 2018, new tax laws increased the standard deduction to $12,000 for individual filers and $24,000 for married couples. For married seniors over the age of 65, the standard deduction is $26,600. Those increases gave many people less incentive to itemize. Non-profits worried that this would result in a decrease in giving. Indeed, when adjusted for inflation, charitable giving in 2018 declined by 1.7% over 2017.

Fortunately, there are still ways to do good and still receive additional tax benefits:

• Bundle donations: Consider combining two years’ worth of donations into a single year. For example, if you regularly donate $10k each year, make next year’s donations before the end of this year. If you combine that $20k total with other deductible expenses like state and local taxes and mortgage interest, the total could easily exceed the standard deduction limit.
• Appreciated assets: Don’t have a lot of cash on hand? If you own stocks, bonds, or other assets that have appreciated over time, you can donate them. You take the full value of the asset as a charitable donation and avoid capital gains taxes.
• Qualified charitable distributions (QCD): Seniors aged 70 1/2 or over may transfer any amount (up to $100k) from their IRA to a qualified non-profit. If you’re at a point where you have to take mandatory distributions from your retirement accounts, this helps you support your favorite charities and avoid paying taxes on the distributions.
• Donor advised funds: A donor advised fund (DAF) is like your own private foundation. You place the money with a financial firm that manages a DAF. Tax benefits include a tax deduction in the year you contribute to your DAF, no capital gains tax when you contribute appreciated assets, the DAF balance isn’t subject to the Alternative Minimum Tax, and the money grows tax-free. You then make grant recommendations to qualified charities on your own schedule.

Bundling donations or making large donations via a QCD or DAF within a single year may also reduce your taxable income to a level that reduces your capital gains tax rate on your other investment income.

Take Advantage of Catch-Up Contributions

Contributions to retirement accounts and health savings accounts (HSAs) are tax deductible up to certain limits and reduce your taxable income. The good news for people over 50 is that you’re allowed to make extra tax-deductible contributions, called catch-up contributions.  These are intended to encourage people nearing retirement age to save more.

Here are the limits for each type of account by age:

Cut-off dates for the contributions (including catch-up amounts) are as follows:

• 401(k), 403(b), 457: Contribution deadline is the due date for the tax return for the year in which contributions are being made. If you file for an extension on your taxes (from April 15, 2020 to October 15, 2020, for example), then your deadline is October 15, 2020.
• Traditional & Roth IRA: Last day to contribute is April 15, 2020.  You must take any required minimum distributions, however no later than Dec. 31, 2019.
• HSA: Contribution deadline is April 15, 2020 to take a tax deduction for the 2019 tax year. However, you can’t use HSA funds to pay qualified medical expenses incurred before you opened the account.

Investigate State Tax Breaks for Seniors

Age does have its privileges in some states! Some offer seniors age 65+ tax breaks on state and local property taxes, while most states exempt some or all Social Security benefits and pension income from state income taxes.

All 50 states offer some type of property tax relief for seniors. There may or may not be income restrictions.

Here are a few state examples:

• Alabama: Social Security benefits 100% exempt from income tax. Public and private pension income is not taxes. People with disabilities and those over age 65 can receive property tax breaks (subject to income levels).
• Iowa: Social Security benefits 100% exempt from income tax, and the state offers a deduction on other types of retirement income. People with disabilities and those over age 65 can receive property tax breaks (subject to income levels).
• New Hampshire: No state tax on Social Security or pension benefits. There’s no state income tax on wages, but interest and dividends are taxed. Property tax abatements and exemptions are available for some retirees, depending on length of residency and income.
• New Mexico: All forms of retirement income are taxed, but seniors can receive a tax deduction up to certain income limits. Most seniors and disabled residents qualify for some form of property tax breaks.

Spend Your Flexible Spending Accounts!

This is good advice for everyone, retired or not. Flexible spending accounts (FSA) are programs sponsored by your employer that allow you to set aside a certain amount of money from your paycheck to pay for qualified medical expenses.

But there’s a catch.  Unlike an HSA, the money doesn’t automatically roll over from year to year.  If you have $700 left in your FSA on December 31, you could lose it.  Under the law, employers can allow you to either carry over up to $500 to into the new year and still make the maximum contribution in the following year or allow a 2 1/2 month grace period (until March 15) to use the unspent funds.  Note that if you use the carryover option, you could forfeit $200 of your unspent FSA funds. The law allows employers to either keep unspent money to pay administrative costs or apply the money to the employee’s account the next year.

As you can see, employers get a fair amount of freedom to implement their FSA programs and set the rules.  Make sure you clearly understand the plan and keep close track of your spending.

Get Free Tax Help

If this all seems really complicated…. well, it is!

Most people don’t have a CPA or tax lawyer on call, but there are free resources for tax help and advice:

• Tax counseling for the Elderly: The TCE program provides free tax assistance to people who are age 60 and older. IRS-certified volunteers provide free assistance and basic income tax return preparation with electronic filing to qualified individuals at community locations across the nation.
• AARP Foundation Tax-Aide: Volunteers are IRS-certified and provide cost-free assistance to anyone age 50 and over. You don’t have to be an AARP member.
• State governments: Check with your state and/or local Department of Revenue. Many states also offer free help with tax preparation and questions.

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