December 23, 2020
Tax Tips for 2020 Filing That You Should Know
Whether you’re retired or near retirement, here are tax tips for extra credits and penalties to avoid when you file your taxes this year.
One of people’s biggest fears during their retirement years is not having enough money to last through retirement. In fact, 60% of Americans are more afraid of running out of money in retirement than death. There are many different tax tips that one should consider as they are planning for retirement or are currently in retirement. One of the best ways to help ensure your money lasts through retirement is to have an efficient tax plan that minimizes taxes on your retirement income.
There are additional tips to save money when you file your tax return this year. Online tax preparation tools like TurboTax, H&R Block, and TaxSlayer provide you with affordable solutions and tax experts that help you find additional savings. They will work with you step-by-step, find more deductions and credits, and review for errors. Get expert guidance without paying a hefty price when you can file your taxes online.
Not only will having an efficient tax plan on your retirement income save you money, but it will also help you avoid any unnecessary financial stress so you can sit back, relax, and enjoy your retirement. Better safe than sorry–don’t end up with a hefty tax bill at the end of the year!
Here are some tips on how you can minimize taxes during your retirement years:
Plan for Taxes on Retirement Income
First, you should become familiar with which taxes you can expect to see on your retirement income. This differs depending on how tax-friendly your state is, but the types of taxes you can expect to see on your retirement income are generally the same. With the exception of a Roth IRA, the withdrawals you make from your retirement savings, such as your 401(k), pension plan, or an annuity are taxed as ordinary income. One of the best ways to minimize taxes on your withdrawals is by remembering to withdraw your Required Minimum Distributions (RMDs) from your accounts every year. That way, you can easily avoid a large 50% tax penalty on the amount you did not withdraw.
Minimize Taxes on Your Medical Expenses
In retirement, medical expenses can make up a significant amount of your spending. So, make sure you’re saving as much as possible by itemizing your deductions for medical expenses. Even though you are not able to claim a deduction on all expenses, you should still be keeping track of all of them throughout the year including hearing aids, doctor’s visits, lab tests, and Medicare premiums. In 2020, the IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross income or “AGI”.
To minimize taxes on health care costs, you can also open up a Health Savings Account (HSA).
What is an HSA?
An HSA is a tax-advantaged savings account. Opening up an HSA gives you three tax benefits:
- Contributions are pre-tax (opened through employer) or tax-deductible (opened on your own)
- No taxes due on the growth of the account
- Withdrawals are not taxed when used for qualified medical expenses
If you withdraw for any non-medical or non-eligible expenses, you will be taxed on the withdrawal. In addition, if you are under age 65, you will also pay a penalty if you withdraw from your HSA on non-qualified purposes.
Another benefit to an HSA is that it can also be used to invest in mutual funds, stocks, and more.
You are eligible for an HSA if you have a high-deductible health plan (HDHP), do not qualify for Medicare, and are not claimed as dependent. Once you turn 65 and qualify for Medicare, your HSA can still be used for out-of-pocket medical expenses but you are no longer able to contribute to it. However, not all health insurance plans allow you to open an HSA. If you’re interested in one, make sure your healthcare plan is “HSA-eligible.”
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Make Charitable Donations to Save on Taxes
In addition to volunteering your time, one of the best things to do to minimize your taxes on retirement income is to donate to charitable organizations. Donating to charity is a great way to continue to make a difference in your community and help others. A tax-savvy way to donate to charities is to donate directly from your IRA with a Qualified Charitable Donation (QCD) for those over 70 ½ years old. That way, it goes towards your RMDs and does not count as a taxable income.
Another way to donate to charity and minimize taxes on your retirement income is to donate appreciated stock or other investments from a taxable account. While the QCD is for IRAs, the direct transfer of securities to charity from a taxable account allows you to avoid paying capital gains on the distribution.
Earn Credit for Being a Caregiver
If you’re taking care of your elderly parents, don’t miss an opportunity for possible tax deductions and exemptions. In order to claim a $500 tax credit, you need to claim your parents as your dependents. In order to do so, they must meet certain requirements like:
- Their gross income does not exceed $4,200
- You provide more than half of the support
- They live with you under your household
As a result of this, you can file a personal exemption and claim a tax credit. In addition, you may be able to claim medical expenses as an itemized deduction if you’ve paid for your parent’s medical care.
Using online tax software tools like TurboTax, TaxSlayer and H&R Block will help you find additional tax deductions and credits that you can receive. Let their tax experts find additional savings you’re entitled to when you file your tax return.
Relocating to a Tax-Friendlier State
Another great way to minimize the amount of taxes you pay on your retirement income is to move to a state with lower tax rates. This can provide relief on how much in income taxes, property taxes, and sales taxes you pay with your retirement income. Some of the most tax-friendly states are Florida and Texas because they have no state income tax. By moving, not only can you enjoy a tax break, but also sunny weather.
Relocating or moving homes can also be a good way for you to tap into existing home equity. Your home equity can allow you to take out a home equity loan, finance improvements, or prepare for unexpected expenses through the use of a Home Equity Line of Credit, or HELOC. Relocating may also give you the opportunity to lower your housing costs and your cost of living.
With these tax tips, you’ll be able to save more of your hard-earned money and enjoy the retirement you deserve.