Hear Emily Petty and Matt Bellomo discuss tax planning issues for retirees. Our checklist highlights things you may not have considered that can have a tax impact, planning opportunities, tax saving tips, and more. From investment income and capital gains tax to deducting medical expenses, our quick video has it covered.
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Hello, I’m Emily Petty.
I’m one of the wealth managers at Windward Private Wealth Management and I’m joined here today by Matt Bellomo, another one of the wealth managers at Windward. We’re here today to discuss things that retirees should consider when they’re reviewing their 2020 income tax returns.
Our conversation today is going to be kept at a pretty high level but if you have any specific questions, please feel free to shoot us an e-mail at email@example.com or use the Contact Us button on our website, windwardfp.com.
The first topic we’re going to discuss is family and filing issues.
So, Matt, what are some considerations retirees should consider around this?
Thank you, Emily, and welcome, everyone.
The first topic is the standard deduction in 2017 was increased dramatically.
To $12,400 if you’re single $24,800, if you are married filing joint.
One thing to keep in mind is because these are more generous than they used to be, more people are taking the standard deduction versus itemizing on their individual income tax returns.
So that’s no surprise.
And accordingly, many folks have stopped giving us itemized deductions, because why put it all together to take the standard deduction? One caveat with the 2020 tax return, however, is the CARES Act allows for a $300 charitable contribution deduction above the line.
So please be sure to tell us whether you had cash contributions from 2020 for a deduction.
Next, filing status changes from time to time. Commonly, a divorce or a death of a spouse.
If the spouse is deceased, that means that the surviving spouse can still file as married filing jointly for the year of death.
If they have qualifying dependents, they may be able to do so for two more years.
Reach out to us if you have questions.
What this does is it creates some opportunities, perhaps in the year of death. Silver lining around a dark cloud.
For retirees who are over 65, it’s important to note that they get an extra standard deduction. $1,300 per person, which means that if you’re single, it’s $13,700.
If you are married, and one of the spouses is 65 or older, $26,100. Or if both of you are 65 and older, $27,400. So again, pretty generous and which increases the likelihood of taking the standard deduction.
Lastly, in this section, review your balance due or refund and adjust the payments/withholdings accordingly.
One of the things it’s going to be really important, in reviewing the 2020 tax returns is that in 2020, RMD’s were suspended.
So, for many retirees, they chose not to take their RMDs (their Required Minimum Distributions, that is) and instead use funds from other sources to fund their expenses last year.
So withholdings, your balance due, and your withholdings might be a little different than they’ve been in the past.
And so you might want to look at 19 and 21 and trying to make sure that you’re in that space.
So you plus or minus not a whole lot. In other words, no large balance dues or large refunds.
And one thing to keep in mind, if you are taking distributions from an IRA, you can adjust the withholdings if you’re taking withholdings from the IRA.
So that you kind of balance out and you don’t have larger refunds or a large balance due.
So some things to keep in mind at a very high level with those kinds of issues. Emily, I don’t know if you have anything to add in that regard?
I don’t know.
I was thinking, you know, what would be reasonable like, maybe like under a thousand dollars is probably a good goal to go for. Like if you’re having to shell out over a thousand dollars, it might be reasonable to be adjusting those withholdings or estimates.
And if you do have a large balance due, as long as you’re prepared for it, fine. Yeah. It’s incumbent upon us for those folks that we do tax returns for, to make sure that we’re communicating all of that throughout the year. So I agree.
Plus or minus $1,000 dollars tends to be what most people are comfortable with, plus or minus.
Yeah, we don’t want any surprises. Correct.
OK, so when it comes to investment income issues for retirees, a lot of the things on this list involve if you have a taxable brokerage account, um. In regards to this first item, is any interest or dividends being reported on your tax return correctly?
So if you have an interest bearing bank account or savings account, or if you hold stocks or any dividend producing investments, you want to make sure that you’re getting your 1099 and reporting that income correctly on your tax return.
There is a difference between qualified and ordinary dividends.
And you want to make sure that those are…get on your tax return correctly.
Because qualified dividends are taxed preferentially.
And occasionally financial institutions will issue corrected 1099s because oftentimes they are going through the fine-tuning details of classifying those dividends. It’s not always caught on the first round. So sometimes they’ll crank out a corrected ,second 1099 that has those classified correctly. So I know that for our clients that happens occasionally.
So that’s something to look out for. Also, if you have only electronic communication with your financial institution, make sure you’re logging on and making sure there’s no tax documents out there that you may have forgotten about.
If you’re a high earner and you have a taxable investment account, and are generating a lot of investment income, what might creep up on you is the 3.8% surtax, the net investment income tax.
And there are some strategies that you can do to try to reduce that tax. One involves, you know, just reviewing the underlying investments in your account and seeing what kind of income they’re generating. At Windward where we do tax loss harvesting, where we can. So those are just a few of the things you can do to try to reduce that, that tax burden.
When it comes to capital gains or losses in your taxable investment account, capital gains tax rates are based on your other income. So they can be taxed at 0%, 15%, or 20%.
And how capital losses work is, let’s say you had $50,000 of capital losses and $30,000 of gains in your investment portfolio for the year. That would be a net $20,000 loss.
In that tax year, you can deduct 3,000 of that and the remaining 17 would get carried forward to future years, to deduct going forward. And what you want to make sure that you get that, that amount carried forward from the prior year return to the current year return.
So, I’ve seen that get missed and that’s a big deal.
Um, yeah, and do you have anything else, as far as capital gains or interest and dividends?
I would say, as it relates to capital gains and losses, if there are losses that are going to be carried forward, let us know, so that we are aware of it.
Because if we’re managing the money, we may actually choose to take some capital gains off the table so that that loss doesn’t sit there for years.
So if you had, in your example, $17,000, it would take almost six full years. Well, it would take six years to take that benefit.
And the other thing to keep in mind, is the capital losses, if they’re short-term, ideally, you will offset them with short-term gains, because the short-term gains are subject to ordinary income tax, which are not preferential.
So, if that happens, just let us know and we can help navigate utilizing those tax losses to the most benefit for you and make the best of a bad situation.
Yeah, good point.
Next, we’re going to talk a little bit about qualified plan issues.
And, as I mentioned earlier, in reviewing your 2020, you might notice that you aren’t you didn’t have taken RMD because the CARES Act allowed you to skip the RMD for 2020.
And so one of the things to keep in mind is that 2020 might be kind of an anomaly going forward.
So you probably want to look at 19 to make sure that your 21 return looks a little bit more like 19, 2019.
And plan accordingly.
Because when you’re reviewing your 2020, it’s gonna look a little different, and it’s not going to continue in 2021. So, just something to really zero in on, especially for retirees.
The next item is something that we get pretty excited about here at Windward and that is taking advantage of Qualified Charitable Distributions, the acronym, QCD.
And what it is, is it is, the law allows you to transfer from your IRA directly to a 501C3 charity, up to $100,000 in any given year.
So for folks who have, who are very charitably inclined, this is a great way to make sure that charitable contributions, you get the most benefit for them.
But even for folks who are, don’t have large ambitions as it relates to charitable distributions, this allows you to take the deduction above the line as opposed to below the line, perhaps, even itemize deductions. But, as we mentioned earlier, with the generous standard deduction, especially for retirees, you may not benefit from taking those charitable contributions. This is a way to get benefit for your charitable contributions.
For those of you who are clients, we can actually set up a separate IRA funded with your expected annual contribution limit, provide a checkbook to you, and then you can write checks against the IRA and take advantage of the QCD.
It’s important, though, if you do that, to make sure you exhaust the funds.
The one last thing to keep in mind as it relates to QCDs, is you must be 70.5 at the time that you make the gift or the contribution.
It is not in the year, in which you turn 70.5.
So, it seems like you’re splitting hairs. What’s the big deal?
That’s just what the law says. So we have to play by the rules you must be 70.5 when you make those distributions.
For some of you, you may have made in the past, non-deductible IRA contributions, if you have, please keep us in the loop on that and provide the, um, amount of basis that you have in your IRA.
Basis equals non-deductible contributions, because what it does is it will reduce the taxable portion of your IRA distributions.
The last item I want to touch on in the IRA qualified plan space is oftentimes, people who are retired, say to us, does it still makes sense to do a Roth conversion? And the answer, is, it very well may.
Well, one thing to keep in mind with IRAs and conversions, is that if you are taking RMDs your, you cannot convert that portion of the IRA to a Roth.
So it would be the next dollar, up to maybe the tax bracket limit, or whatever we decided.
So, still may make sense, good idea, oftentimes. Just please reach out to us. We can help you navigate that and make sure that it makes sense, even in the context of taking your RMD.
Emily, you’ve got anything to add in that regard?
I don’t think so. I don’t see a lot of non-deductible IRA contributions these days, but it’s still really important if you’re doing that to make sure you’re keeping track of that.
You know, you don’t want that to get lost in the weeds.
And what’s interesting to keep in mind is often, you’ve changed tax preparers and that is one of the things that gets lost is the non-deductible IRA contributions. So if you say, oh, you know, I remember we did that years ago.
Just, yeah, you know, look at your old tax returns and we can help you figure that out. So yeah, that’s a really good point. It’s very uncommon.
We sure, we certainly would want to take advantage of it if it exists.
So a couple other issues for retirees to consider is if you have large medical expenses.
So, you typically have to have quite a bit of medical expenses to get to deduct them.
Where I’ve seen this pop up for clients is deducting nursing home expenses. It’s expensive and a lot of it you can deduct. So there’s typically a life care fee or a founder’s fee that you either pay monthly or as a lump sum. And usually, a portion of that is deductible and they give you a statement telling you which part is deductible.
The other part where…or kind of along those same lines, where I’ve seen this kick in is for qualified long term care services.
So, necessary expenses to take care of someone who is chronically ill, that cannot perform two activities of daily living. A lot of those expenses are deductible and so you just want to make sure that you’re keeping all those receipts and everything really organized and give them to your tax preparer and make sure that your tax preparer understands your situation or really what’s going on with your medical situation.
So another issue that sometimes comes up are state specific issues.
So like some states allow 529 deductions for contributions that you maybe put into your grandchild’s 529 account, um, you can deduct that.
Some states don’t tax Social Security or they don’t tax part of it.
Same with certain pension benefits. They may not tax.
Also, there are unique state tax credits.
I can think of a client that lives in Arizona that gives to a certain charity and there is a specific tax credit for that charity. So you just want to be familiar, especially with state tax credits, not every preparer is going to be necessarily familiar with all those state specific credits.
So can you think of any other issues that a retiree may want to consider? Kind of miscellaneous tax issues?
One of them would be if there are gift tax considerations.
So, if you gave more than $15,000 to a particular donee, that’s something that oftentimes slips through the cracks, while not a huge deal today it’s important. So I think it’s important to note that.
And then, two things specifically about the medical that might be important to you in 2020, Again, because people didn’t take RMDS, their adjusted gross income may be lower, which might mean they got to take advantage of medical expenses that they typically aren’t able to take advantage of.
So, again, when you’re looking at 2021, when you have to re-instate the full RMD, you might want to take that into consideration.
The other thing is, if you are in a situation where you’re paying for long term care, dementia care, things like that, where it could be five, $6000 a month. Yeah.
Consider where the funds should be taken from to pay for those expenses. And if the options are a taxable account, brokerage account, or an IRA, it may be better, may be better to take them from the IRA.
Because, as you create ordinary income, you’re also getting an offsetting ordinary deduction.
So, something to just keep in mind, reach out to us.
We can help you determine what is the best source of the funds to pay for some of those expenses, because it’s very expensive, obviously, and we want to make sure we get the best tax answer, all things equal.
So, just a couple things to add to that. Yeah, that’s a great planning nugget there.
Well, thank you for listening to our checklist about things for retirees to consider when they’re reviewing their 2020 income tax return.
Again, if you have any questions, please e-mail firstname.lastname@example.org.
Thank you again for your time. Thank you. And have a good day.