Tax season is here! As you gather paperwork and collect information for your accountant, look for the tax deductions that apply to you.. Unfortunately, many people miss out on valuable opportunities to create tax efficiencies in their financial plan simply because they do not know about them. Anchor Wealth advisors can guide you on ways to get more from your earnings and investments. Here are 9 tax breaks that everyone over 50 should know about.
1. Contribute More to your IR
At the age of 50, you can contribute an additional $1,000 to your IRA. This catch-up contribution can help make up for years you didn’t save enough.
2. Convert a Traditional IRA to Roth
For people who are retired and in a lower tax bracket, converting from a Traditional IRA to a Roth could be the right option. Initially, you will pay ordinary income taxes on the conversion; however, with a Roth your money will grow tax-free, and you can withdraw it tax-free as long as the withdraw occurs five years after your first contribution to the Roth IRA. It can even be passed on to heirs tax-free after your death.
3. Capital Gains Distribution
Capital gains are categorized as either long-term or short-term and are taxed accordingly. Any profits made on selling your assets in non-qualified accounts are taxable. Short-term capital gains (profits made on assets you’ve had for less than a year) are taxed like regular income. If you hold on to your capital assets for more than a year before selling, taxes decrease significantly.
4. Municipal Bonds
Municipal bonds have attractive returns because they are not subject to federal taxes. If the bond is issued by the state you are a resident of, you can avoid state taxes as well. This is a good option for people who want a low-risk investment that keeps their taxes low.
5. Health Savings Accounts
Contributing to a health savings account (HSA) could be a tax-efficient move.. Money used for health-related purposes is added to your account pre-tax, lowering your taxable income. Once you are over 55, HSA benefits increase, allowing contributions of an additional $1,000 to be added to your account.
6. 401(k)
Once you turn 50, you can contribute an additional $6,500/year to your 401(k) account. Generally, as you get older your salary increases, so this is another type of catch-up contribution that can compensate for savings you were not able to make when you first started earning a paycheck.
7. Backdoor Roth IRA Contributions
If you are a high-income earner, and ineligible for a Roth, you might want to consider backdoor Roth contributions. Set up a traditional IRA and then convert it to a Roth to take advantage of tax-free withdrawals.
8. Charitable Giving
If you are already charitably inclined, you can donate money from your IRA and avoid being taxed on that withdrawal. This provides a tax-efficient approach to charitable giving.
9. Senior Property Tax Credit
Many states, Illinois included, have a senior property tax credit. You just need to fill out a simple, one-page form to receive this deduction. This credit is for property owners over the age of 65 and is based on income.
For many people, tax season can be overwhelming, but it shouldn’t be a cause for stress. As you consider ways to reduce your taxes, make sure you speak with a professional about your options. Call our office and we will connect you with an Anchor advisor who can help set you up with a financial plan that seeks to take advantage of the tax strategies available to you.
By Michelle Boisvert, Sr. Wealth Advisor & Chris Perry, Wealth Advisor