(WHTM) — When it comes to taxes for seniors, be careful. Chris Orestis with Retirement Genius says there are tax opportunities and tax traps. It is important to know the difference between the two.
“There are some areas in taxes that are advantageous once you become a senior. You get certain reductions in tax rates, certain opportunities for tax reductions, but then there’s also areas that if people don’t understand what they’re doing with their taxes, with their income, with their retirement accounts — it can end up costing them more in taxes, in penalties, in things like that,” Orestis said.
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There’s a trap many people don’t realize — social security can be taxed if you’re still bringing in an income.
“If you’re making up to $19,500 in additional income that won’t impact your social security, but if get above that threshold, then you’ll feel a tax impact on your social security benefit,” Orestis said.
For people age 65 and older, Orestis says that one tax advantage they have is investment income.
“Investment income is a good example of a tax opportunity. If you’re getting investment income, dividends, or capital gains. Once you hit 65 your tax rate drops to 15%,” Orestis added.
Long-term care expenses can also be tax opportunities. “The cost of a nursing home, memory care, assisted living, home care or your paying premiums on a long term care insurance policy…all those dollars can be tax-deductible.”
A retirement account can be both a trap and an opportunity. The money you put into a 401k while you’re young and working, those are pre-tax dollars, but “if you take money out of those accounts too soon, before the age of 59 and a half, you’re going to pay a 10% tax penalty on top of the income tax for the money you withdraw.”
Many seniors are on a fixed income and every little bit helps. So, avoid traps and seek out opportunities.
“If you aren’t maximizing your dollar, if you’re not getting the most out of every dollar, and if you’re not doing all you can to keep every dollar in your pocket that you’re entitled to versus giving it up to Uncle Sam, then you’re just going to feel that as a short fall in your budget, in your lifestyle,” Orestis said.
He also says, with retirement accounts, once you reach the age of 72, you have to tak a certain amount out of the account every year or you will be taxed. As always, it is a good idea to sit down with a tax adviosr to make sure you’re paying what you owe, but not more than you owe.