Four Important Tax Items Every Advisor Should Know About

Retirement may mean that you've stopped working, but it doesn't mean that you're finished with worrying about taxes.

Many people think that when they get to retirement, they'll be in a lower tax bracket. But the reality is that taxes in retirement can be more confusing, a bit trickier, and just as much a part of your financial reality as when you were working.

There is a wide range of tax implications for retirees, and having a good working knowledge of what those are ahead of time can reduce stress and make that hard-earned retirement more enjoyable. Here are four fundamental areas that are important to know:

Retirees Need to Do Proactive Tax Planning

Much of retirees' income is still taxable, and planning to pay federal income taxes may require more thought. Some sources of income have federal income taxes automatically withheld, but other sources may have withholding only upon request. You may need to consider filing quarterly estimated taxes if you're not having enough federal income taxes withheld from your distributions.

For example, with your 401(k) plan distributions, 20% is automatically withheld from some kinds of distributions but not required minimum distributions (RMDs). With pension payments, IRA distributions, Social Security retirement benefits and annuity payments, you can generally request to have taxes withheld -- or not.

Here's where it can start to get a bit complicated. Let's take your 401(k) or IRA, for example. Distributions are taxed as ordinary income when you withdraw them. But those withdrawals can also have an impact on the taxes you pay on your Social Security benefit. If you take too much money out of your 401(k) -- up to 85% of your Social Security benefit can be taxed as ordinary income.

These are examples of how taxes in retirement can get stacked upon one another. That's why retirees need to understand the difference between tax preparation versus tax planning. Tax preparation is what you do with your CPA every year. The CPA sits down and records history. In other words, this is the money that comes in, and this is how much you owe in taxes. But tax planning is asking the question: "How can I owe less by strategically planning today?"

The Tax Cuts and Jobs Act of 2017 reduced income tax rates so that they are low compared to recent history. Those rates are scheduled to go back up at the end of 2025, and if they do, some people will be retiring into a higher tax bracket. So for the next seven years, many retirees are afforded some opportunities to take advantage of the tax law, such as by considering a Roth conversion.

Don't Forget about Medical Expenses

With the increase in the standard deduction (to $12,200 for individuals and $24,400 for married couples in 2019), being able to take an itemized deduction for medical expenses isn't an option for many people for whom it might have been in the past. It's essentially only for people who have significant medical expenses. But it's still important to keep track of all those from the beginning of a tax year, even if you are in good health. If an unwelcome surprise occurs that leads to high medical bills, you want to have documentation as you go along.

Beginning with 2019, taxpayers may be able to claim an itemized deduction for only the amount of the total unreimbursed allowable medical expenses for the year that exceeds 10% of their adjusted gross income. Taxpayers often overlook several medical expenses, including hearing aids, medical equipment, doctor's visits, out-of-pocket payments for lab tests, prescriptions, premiums for Medicare Parts B, C & D, eyeglasses and long-term care insurance premiums.

Possible Credit for Those Caring for an Aging Parent

If you are a retiree caring for an elderly parent, you may be able to claim a $500 credit. The elder has to meet certain criteria: He or she must be related to you, must be a citizen of the U.S. or residing in Canada or Mexico and cannot have a gross income of over $4,150.

Additionally, the requirements are that a retiree and spouse can't be claimed as dependents by someone else, the elderly parent isn't filing a joint return, and the retiree paid for more than half of the parent's support for the calendar year.

Make Gifts and Charitable Donations Work for You

This is a big part of the story, because many retired people like to give to charity. Yet, charitable giving has changed for many retirees because the new tax law raised the standard deductions and, for many people, took away itemizing.

It's important first to know that a gift to family or friends is treated differently from a charitable donation. The IRS allows you to give $15,000 in a year to an individual or to a family member without having to worry about federal gift taxes. If you give more than that to a family member or any single person, you must file Form 709, disclosing the gift. Also, gifts to family are not income tax-deductible.

One way for a retiree to make a tax-efficient gift to charity is through the Qualified Charitable Distribution (QCD) program. Available to those who are 70½ or older, the QCD is sent directly from their IRA and paid to the charitable organization. Going that route, the QCD does not result in taxable income to the retiree, and it goes toward satisfying the taxpayer's RMD.

As you head into retirement, it's crucial to understand all the tax implications. After working so hard for so many decades, you want to make sure you get the most out of all those dollars you saved and earned.

Dan Dunkin contributed to this article.

Investment advisory services provided by Hobart Private Capital, LLC an SEC Registered Investment Adviser. Insurance services offered separately through Hobart Insurance Services, LLC. Hobart Private Capital and Hobart Insurance Services are not affiliated with GF Investment Services.

We do not provide, and no statement contained herein shall constitute, tax or legal advice. You should consult a tax or legal professional on any such matters.

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