Income Tax Issues For Seniors

Sometimes we think either a Hollywood scriptwriter or the Internal Revenue Service came up with the phrase, “You can’t take it with you”.  But frankly, no government or tax accountant for seniors would want you to leave a lot of your money to heirs, either. This often forces senior citizens to dip into their ever-dwindling nest eggs each year or pay additional taxes to the IRS.

Especially for those with higher incomes in major metropolitan areas, it is always best to find income tax assistance to help you plan your tax liability.  To do your own taxes there are so many new laws, changes, and exceptions to be aware of.

For instance, you should contribute to an HSA account each year. All contributions to a HSA account are tax deductible and withdrawals for qualified medical expenses are not subject to income tax. For 2017, the maximum contribution to a HSA is $3,400 for self-only coverage and $6,750 for family coverage.

Also, when you turn 70½ you must begin taking money from your tax-deferred retirement accounts, such as a traditional IRA, workplace 401(k) or self-employed retirement plans.   It’s no secret why the IRS wants you to start drawing down these accounts. Your money sat in the account for years out of reach from the IRS as it accrued tax-deferred earnings.

The IRS has created tables to calculate these annual withdrawals, known as required minimum distributions or RMDs. They use longevity data and are designed to ensure that most of your retirement benefits are paid to you during your lifetime.  Although RMDs are triggered once you turn 70½ you get a bit of timing leeway for your first required withdrawal. You have until April 1 of the year that follows the calendar year of your 70½ birthday, which is six calendar months after your 70th birthday.

There are also special yearly rules that come into play whenever the tax code is changed, or if there are major shifts in the financial markets, presidential elections, etc.  For instance in 2009, due to the stock market decline, some seniors enjoyed a RMD break. They didn’t have to take that year’s required withdrawals — but there were restrictions to this rule as well.  The last two years have seen more changes to the tax code and especially estate planning, then in the preceding decade!

Tax planning software from Intuit is like having your own personal accountant who knows there’s one other way you could avoid taking out your retirement money and still avoid the hefty penalty that is usually assessed on missed RMDs. You can have your RMD amount transferred directly to an eligible charity.   Again, working out these details with your tax accountant is the only way to remain legal, minimize your financial obligations, all while doing proper estate planning.

First and foremost, never make impulsive decisions based on circumstances almost certain to be temporary. Even in the unlikely event of permanent repeal of the federal estate tax, much existing planning will continue to make sense to promote orderly wealth transfer, asset protection and business succession.

For example, though living trusts typically include estate tax planning provisions, terminating the trust would deprive a client of its many non-tax benefits such as protection against incapacity, a potentially smoother probate and a comprehensive distribution scheme.

Your tax accountant may also tell you that life insurance purchased for estate tax liquidity is often owned in an irrevocable life insurance trust (ILIT) in order to exclude the proceeds from the taxable estate.  However, regardless of estate taxes, ILITs may continue to be used for large policies because they can be drafted to protect policy proceeds (as well as any other trust assets) from a beneficiary’s creditor problems, divorce or even simply from irresponsible beneficiaries who, without the protection of a trustee, might make bad spending and investment decisions.

This entry was posted in Senior Tax Services and tagged , , , , . Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>


This site uses Akismet to reduce spam. Learn how your comment data is processed.