Retirement Savings and Taxes

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By Steven J. Weil, Ph.D., EA

One thing is certain: the longer you wait to start planning for retirement, the harder it will be to accumulate the funds you need. While how much you put away and what kind of plan you choose are both important, the most important thing is to start early.  Here are some points to ponder about how the changes in tax deductions can affect deductions on charitable contributions and on estate and gift taxes.

The “Tax Cuts and Jobs Act” signed into law on December 22, 2017 increased the limitation on deductions to public charities from 50% to 60% of adjusted gross income (AGI), beginning January 1, 2018.  However, you must itemize to receive any benefit from charitable deductions.  As a result of the increase in the standard deduction and the decrease in deductions for taxes and mortgage interest along with the complete removal of miscellaneous itemized deductions, it is now harder for taxpayers to itemize. 

Some things depend on your age. If you are 70½ or older, you must start to take required minimum distributions (RMDs) and pay taxes on 401(k)s and IRAs to avoid penalties.  However, you can save on taxes if you want to make a qualified charitable deduction (QCD) from your IRA. Make your charitable contribution (up to $100,000 a year) before you take the RMD, and make it directly to the charity.  That way it won’t be part of your AGI.

Catch-up IRA and 401(k) contributions are also age-related. If you will turn 50 in 2019, you qualify for catch-up contributions of up to $7,000 in an IRA and up to $25,000 in a 401(k). You can contribute to an IRA through the tax-filing deadline in 2020, but you must max out your 401(k) by the end of 2019.  It may also be wise to increase the amounts you contribute to a flexible spending account or a health savings account.

Do your itemized deductions exceed the standard deduction of $12,200 for single filers or $24,400 for married couples filing jointly? If you are 65 or older, the extra standard deduction is $1,600 per person for joint filers and $2,600 for single filers.  If you itemize, any unreimbursed medical costs over 10% of your AGI are deductible.

It’s good news for some that the basic estate and gift tax exclusion increased from $5.5 million to $11 million dollars per person. However, it’s important to remember that this expansion sunsets at the end of 2025.  At that time the exemption returns to $5.5 Million as adjusted for inflation.

Taxation of your savings in retirement is a complex topic requiring important choices and some insight into the future.  Will your income go up, placing you in a higher tax bracket?  Will you retire making more or less than you are today? What kind of return do you expect to see on your investments?  It is possible and advisable to plan ahead with your tax advisor so that you don’t pay more than necessary.

Dr. Weil, an Enrolled Agent, operates several businesses, including RMS Accounting (1984) and its division, Bookkeepers Now (1986).  With his wife, Theresa, he oversees a staff of 16 full-time, year ‘round employees in their Fort Lauderdale offices.  They consult clients on all tax matters, including tax preparation and planning, bookkeeping, payroll, estate planning, audit representation, and other financial services.   

Dr. Weil, president of RMS Accounting, has spoken on the subject of late tax filing on Good Morning America, has fielded tax questions from radio listeners and appeared on a number of local radio and television programs. He has been quoted in U.S. News & World Report and twice in Forbes as well as many other business outlets.   

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