It’s important to know how tax rules differ in retirement, when your income is typically lower.
Even if you’ve done all your own taxes throughout your working life, it’s still a good idea to turn to a professional when you retire. Why? Because the rules are different in the golden years when your income is typically lower. You may also be drawing out of tax-deferred accounts and on assets loaded with capital gains and/or losses.
A professional can help you nab every potential deduction and tap accounts in accordance with the laws to help you avoid a bigger-than-necessary tax bite from the IRS. The general rule is to draw from your taxable assets first, then the tax-deferred, leaving the Roth individual retirement accounts (IRAs) as the last resort and the potential go-to fund if you have a heavy-income year, for example, because you sold property.
And remember this: Your income may be lower, but your tax bracket may not. The IRS looks at adjusted income, not gross income, and you may no longer have the same tax credits you did when you were gainfully employed. You also may not be spending as much daily on potential deductions—think lunch, transportation, software, etc.—that you did while employed. Sure, that’s less expenditure but also fewer deductions.
Here’s a quick list of things to think about:
We do have some recent good news for seniors: On August 19, 2022, President Biden signed the Inflation Reduction Act, which requires the federal government to negotiate prices for some drugs covered under Medicare Parts B and D starting in 2026. This new negotiating power expands to more drugs each year, is estimated to save Medicare $98.5 billion through 2031, and is expected to also reduce Part D premiums for seniors.
And starting in 2023, the law requires drug companies to pay rebates to Medicare if prices rise further than inflation for drugs used by Medicare beneficiaries. And by 2025, the law will cap annual out-of-pocket drug costs for Part D enrollees to $2,000, which could be particularly helpful for seniors with catastrophic health issues like cancer, hepatitis C, or multiple sclerosis.
In addition to reducing Part D premiums, the new Inflation Reduction Act is projected to dampen the rise in Medicare Part B premiums too. Remember that this will be very impactful because Part B premiums are automatically deducted from your Social Security checks.
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