As a retiree, how do you plan to spend your Christmas? You may be visiting or hosting family for the holiday, preparing for a special vacation, or simply relaxing and enjoying your pastimes and hobbies. Whatever you choose to do, make some time before the holiday begins to assess your finances and avoid potential tax headaches.
Seniors face a set of income thresholds regarding taxes and medical insurance premiums that can be costly to cross. By reviewing your income to date, you may be able to make adjustments that help you stay below these thresholds.
Social Security benefits are not generally taxable, but they can be partially taxable if your collective income – defined as adjusted gross income (AGI) and non-taxable interest along with one-half of your Social Security benefits – reaches certain threshold values. For individuals with collective AGI of $25,000 to $34,000, up to 50% of Social Security benefits may be taxed. For individuals above $34,000 in collective AGI, up to 85% of benefits are taxable. For married couples filing jointly, the income thresholds rise to $32,000 and $44,000 respectively.
If you are drawing Social Security benefits but haven't reached full retirement age (FRA) yet, don't forget to factor in the earnings limit that triggers benefit reductions. If you are under your FRA for the year, Social Security deducts $1 in benefits for every $2 earned above $16,920 (the 2017 limit). If your FRA occurs during that year, $1 Is deducted for every $3 in earnings above $44,880, but only for earnings in the months before your FRA. Check the SSA website for details and special cases, because a miscalculation here could put you on the wrong side of the other income thresholds.
Medicare Part B premiums will increase beyond the standard rate (currently $134 per month) if your income is above $85,000 as an individual (or married filing separately) or $170,000 for married couples filing jointly. Medicare refers to the increase as an Income-Related Monthly Adjustment Amount (IRMAA). However, the IRMAA is calculated using the modified AGI from two years ago, since that is the most recent information the IRS provides to the Social Security Administration (SSA) – so by adjusting now, you are saving money on your 2019 premiums.
Do you have a health insurance plan through the federal marketplace that is partially subsidized? While aspects of Obamacare are subject to legislative changes, as things stand now, you will lose your federal insurance subsidies if your income is above 400% of the federal poverty line for your family size in the previous year. For 2018 subsidies, the 400% mark is at $48,240 for single households and $64,960 for two-person households.
How can you adjust your AGI? There are many possibilities. You can adjust the income you draw from your retirement funds as long as you still take any required minimum distribution. If you're still working, you may be able to defer income, bonuses, or capital gains into the 2018 tax year. You may also be able to sell off underperforming investments as part of a tax-loss harvesting strategy. How about making year-end charitable contributions to claim deductions?
All of these may be valid strategies, but consult your financial advisor or tax preparer to verify the AGI reduction strategy that's right for you – especially given the potential for last-minute legislative tax changes this year.
While you're assessing your income, don't forget about the taxes paid throughout the year. If you're recently retired, you are probably still used to the automatic withdrawal of taxes that your previous employer used to contribute. In retirement, you are now responsible for that contribution.
You must have your taxes automatically withheld from whatever income sources you have available, or you must make estimated tax payments throughout the year to avoid penalties. In most cases, as long as your payments are made on time and total to within $1,000 or 90% of what you will owe for the tax year (or 100% of the previous year's taxes), you should remain penalty-free. Take any end-of-year income adjustments into account as you assess your tax situation.
With a little year-end forethought and action, you can potentially save money and avoid headaches at tax time. Make your adjustments now, and you can enjoy the rest of the holiday season knowing that you are better prepared for the New Year.
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