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Many retirees may face larger tax bills this year (and next), but there’s still time to make some strategic moves.
What’s going on?
For starters, seniors’ budgets may take a new hit this tax season — a federal income tax bill on a portion of their Social Security benefits.
Social Security recipients received a high cost-of-living adjustment (COLA) of 8.7% in 2023 — an average of $140 more per month. That extra padding could push them over the income threshold that makes their benefits taxable.
And while we were all delighted to see the balances in our retirement and non-retirement investment accounts swell last year, that, too, translates to a potentially steeper tax bill for 2023 and your 2024 return.
Cooling inflation, a solid job market, and the allure of a future with lower interest rates made it a darn good year for retirees’ investments. The S&P 500 ended the year with a more than 24% gain. The Dow Jones Industrial Average popped up more than 13%, and the Nasdaq swelled 43%.
But before you dance around with your account statements, remember those gains are not all yours to keep.
Here are three basic but effective ways to lower your tax liability for your 2023 return.
Putting money in an individual retirement account lowers your taxable income, which can mean a lower tax bill.
"A number of my retired clients or their spouses have either part-time jobs or they do some consulting work to keep themselves busy," Mellone said. "Most of those part-time jobs do not offer 401(k)s or retirement benefits, but you still may be entitled to make IRA contributions. That would allow you to lower your gross income on your tax statement."
For tax year 2023, the limit on annual contributions to an IRA is $6,500. The IRA catch‑up contribution limit for individuals aged 50 and over is $1,000. You have until April 15 to make a tax-deductible contribution for 2023.
In general, you can continue contributing to a health savings account (HSA) as long as you are not yet enrolled in Medicare and are covered by a high-deductible health plan.
While these accounts are not a substitute for a traditional retirement account, the larger contribution maximum can ramp up your retirement savings with its triple tax advantage. It’s the only account that lets you put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.
You can contribute up to $3,850 to an HSA for self-only coverage. Those age 55 and older can contribute an additional $1,000. Just like IRAs, you can contribute to an HSA up until the April 15 tax deadline.
"The good news is HSA contributions are deductible even for high earners," Sharick said.
Sharick noted that one of the most common sources of itemized expenses that exceed the standard deduction for retirees is unreimbursed healthcare expenses.
"See if there's an opportunity to itemize expenses in excess of the standard deduction, especially medical expenses with your tax filing," Sharick said.
For tax year 2023, the standard deduction is $27,700 for married filing jointly filers ($13,500 for single filers) so any itemized deductions above that amount would deliver a tax benefit.
If you’re 65 or older, you can save a smidge more on your 2023 taxes by taking the extra standard deduction of $1,850 if you are single or file as head of household. If you're married filing jointly or separately, the extra standard deduction amount is $1,500 per qualifying individual. For filers age 65 or older, the additional standard deduction is on top of the regular standard deduction for a given tax year.
If you are 65 or older and blind, the extra standard deduction is $3,700 if you are single or filing as head of household. It's $3,000 per qualifying individual if you are married filing jointly or separately.
"While these may not be massive benefits, they may allow you to keep more money in your pocket," Henderson said.