Top Tax Tips for Seniors From a Professional CPA

Interview with Kristine Nelson, CPA, MPAcc

Tax Day is around the corner, so if you haven’t filed yet—time is ticking. While the new Tax Law may be intimidating, there are some perks that can be beneficial to seniors.

Tax expert Kristine Nelson, CPA, MPAcc offers her professional insight to help you navigate taxes with confidence.

Tax Cuts and Jobs Acts Impact

As Nelson has been preparing tax returns this season, she has noticed that the new tax law changes have been positive for many of her senior clients. She notes that the “effective tax rate, or total tax divided by taxable income, has gone down for many seniors.” Basically, this is the percentage of tax being paid on every taxable dollar. This is on a case-by-case basis, but the net impact of these recent tax changes have made the difference in tax savings:

• Standard deduction has doubled
• Personal exemptions have gone away
• Tax rates have dropped

Nelson discusses:

“While we still have seven tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%, two have remained the same, and five of the brackets are lower, with the highest rate being reduced from 39.6 to 37%. Because each taxpayer has a different fact-pattern, the Tax Cuts and Jobs Act (TCJA) impact varies, so each tax return has to be approached differently and thoughtfully.”

She discusses that some of her senior clients are no longer itemizing because the standard deduction doubled to $26,600 for married filing joint couples ($24,000 + $2,600 ($1,300 additional for each married taxpayer 65 and older)) and $13,600 for singles ($12,000 + $1,600 additional for unmarried taxpayers 65 and older). Those who were itemizing before, are no longer able to deduct their investment expenses, tax preparation fees and safety deposit fees, as that part of the itemized deduction schedule has gone away. Taxes, including state and local taxes and property taxes, are also capped at $10,000 which impacts some taxpayers.

Many Households Overlook Tax Savings Opportunities

Nelson discusses how many households overlook or are unaware of tax savings opportunities:

“When I bring on new clients, I’ll review their past year returns. The opportunities to save generally include fully-funding their 401k with pre-tax dollars, or at a minimum funding to receive the full employer match. Many clients also have Health Savings Accounts, and the contributions for these are pre-tax. Since they incur medical expenses regardless, it makes sense to fund these with pre-tax dollars, and the account grows tax-free. I encourage my clients to take their annual raise and fund the above two accounts if they aren’t already contributing the maximum. Different states also offer tax savings opportunities. A professional can help find savings opportunities the majority of people didn’t know were there.”

She points out that there are other opportunities for savings that are not intuitive. Whether you’re frequenting the doctor’s office, caring for a spouse or elder relative, or making home improvements to accommodate new medical devices, today’s baby boomers are in a better position than ever to benefit from medical and health insurance-related tax deductions.

Here are some of Nelson’s favorite tax tips for seniors.

Tax Tips for Americans Approaching Retirement

As you approach retirement, there are a number of tax considerations to keep in mind.

Social Security Benefits

It’s important to understand the rules and determine when you should start receiving Social Security benefits. You can start receiving benefits as early as age 62, or as late as age 70. There is a reduction in benefits if you start receiving benefits before your full retirement age. If you choose to collect benefits early, and you decide to work part-time before your full retirement age, be aware that there is an earnings threshold.

It’s important to keep the following in mind:

• In 2019, Social Security recipients who earn more than $17,640 will have $1 withheld for every $2 of benefits received above that limit.
• In the year you will reach full retirement age, $1 in benefits will be deducted for every $3 you earn above $46,920.
• Only the earnings you earn before reaching full retirement age are counted toward your benefit.
• Beginning in the month you reach your full retirement age, you can earn as much as you want.

Visit the Social Security Benefits Planner to learn more about getting benefits while working and how this affects your taxes.

Traditional vs. Roth IRA

If you have a large traditional IRA, and you are approaching retirement, it may make sense to convert, or part, all of that traditional IRA into a Roth IRA in your early retirement years – or over a series of years. The best time to do the conversion is when you are at a lower effective tax rate. While you will pay tax on the growth of the account at conversion, the funds will not be taxable when you use them. Roth IRAs are not subject to the Required Minimum Distribution (RMD) rules while the owner is alive. It is important to discuss whether this makes sense for your unique situation with a CPA.

Medical Part B Insurance

In addition to Medicare insurance, many seniors purchase supplemental insurance and prescription drug coverage. It’s important to understand what Medicare Part B covers and whether or not supplemental insurance makes sense for you. If supplemental insurance does make sense, it’s important to have a discussion with someone who is well-versed with the different policy options. For your taxes, medical premiums are counted as medical expenses on Schedule A – Itemized Deductions. Medical expenses that exceed 7.5% of adjusted gross income are deductible. After 2018, the threshold increases to 10%.

Long-term Care Insurance

Long-term care insurance premiums, to a certain amount, are counted as medical expenses. Whether you itemize or not, long-term care insurance makes sense for the majority of taxpayers. Nelson advises clients to consider purchasing a policy when they are in their early fifties.

Tax Tips for Retirees

Here are some helpful tax tips for retirees filing their 2018 taxes.

Taxable Social Security Benefits

Up to 85% of your Social Security Benefits may be taxable. It’s important to be aware of the income thresholds for planning purposes. Visit the Social Security Benefits Planner for specifics.

Required Minimum Distributions

When you reach 70.5 years, you are required to take required minimum distributions (RMDs) from your traditional IRA, SEP IRA, SARSEP, Simple IRA, and all employer sponsored retirement accounts (profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The exception is that RMD rules do not apply to a Roth IRA while the owner is alive. The rules do apply to Roth 401(k) accounts. Learn more about IRS retirement plan and IRA required minimum distributions to find out what applies to you.

Medicare Premiums

Your Medicare Part B premiums are based on your modified adjusted gross income. The standard base premium for 2019 increased $1.50 to $135.50 from $134 a month in 2019. A ‘hold harmless provision’ limits the increase in beneficiaries’ premiums to be no greater than the increase in their Social Security Benefits.

Investment Income

Long-term capital gains and qualified dividends are taxed at favorable capital gain rates. The capital gains tax rates are 0%, 15%, or 20%. For most taxpayers, the rate is 15%. Make sure to hold your assets for at least a year plus one day to avoid paying ordinary tax rates for selling your investments.

Taxes

If you prefer to have your taxes withheld rather than pay in quarterly estimated tax payments, this needs to be communicated. Nelson notes, “If my clients’ answer is the former, we’ll communicate to make sure that amount is withheld from their income sources, such as social security benefits and/or RMDs so that there are no surprises.”

Tax Time and What’s Right for You

Instead of having your taxes be a chore, consider April a time when you expect some extra money—if you do your due-diligence. Finding a CPA you can trust helps not only set you up for tax success, but also retirement success as you can get a ‘big-picture’ financial overview.

Nelson discusses the importance of getting a financial plan started:

“Every article I’ve read indicates that Americans are not saving enough for their futures. There is no ‘one size fits all’ financial plan as it depends on many variables such as projected living and medical expenses in retirement, how often you plan on replacing your car, travel costs in retirement – and the list continues. A personal financial advisor can help you make all these inquiries, check your risk tolerance, review current retirement savings and projected Social Security benefits, and then make a yearly plan for savings opportunities. Meeting on a recurring basis helps keep finances on track as well as give you peace of mind.”

There’s no time like the present. Invest in your future with the help of a professional to get gain the financial confidence you need to make sure you’re prepared for not only tax season, but also retirement.

About Kristine Nelson

Kristine Nelson, CPA MPACC is a Certified Public Accountant (CPA) with a practice in Duvall, WA. She grew up on a farm in Eastern Washington, has always loved math, and enjoys meeting and interacting with her customers to help them reach their unique financial goals.

Kristine graduated from Central Washington University with a Bachelor of Science in Accounting and, after working several years in the field, went back to school and graduated from the University of Washington with a Master of Professional Accounting (MPAcc) degree. She has been helping clients with their tax consulting and compliance needs since she became a CPA in 1997, and enjoys helping them minimize their taxes while offering a sensible, actionable perspective on their personal finances.

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