Tax Moves Boomers Should Make Now

Young couple calculating budget

No one likes to talk taxes amidst all the holiday cheer and end-of-year festivities, but for baby boomers who are on a fixed income and are either nearing or in retirement, year-end tax planning is the key to avoid overpaying on their taxes.

Yes, the official deadline is still four months away, but making a few tax moves now can bring significant time and money savings in April.

Grafton "Cap" Willey, managing director at accounting and professional services firm CBIZ MHM, offered the following tax tips for boomers to avoid giving Uncle Sam more than his fair share of your hard-earned income

Boomer: What are some things boomers can do to minimize overpaying on taxes?

Willey: We’ve seen significant tax changes this year such as phase outs of exemptions and itemized deductions, new tax rate structures, the alternative minimum tax (AMT) and the Medicare surtax on investment income, and all of these might require new planning strategies.

A smart strategy is to plan around capital gains and losses to reduce your tax bill. Depending on your filing status and income, it could make sense to harvest gains in 2013, especially if you expect a higher tax rate in the future. Individuals can use losses to offset both short and long-term gains.

Another tip is to convert to a Roth IRA--this will help future tax planning. Roth IRA withdrawals are tax-free, and there are no required minimum distributions. However, note that you will have to pay the tax on the conversion now, so only convert if you have losses or deductions from previous years.

Don’t wait until the last minute to make tax planning decisions. You have until Dec. 31 to take steps to reduce your tax bill in 2013.

Boomer: What tax provisions are set to disappear at the end of the 2013 year?

Willey: When Congress passed the extender bill last year, it made some of the more critical changes permanent, such as the estate tax changes and the AMT patch. This has taken some of the pressure off passing an extender package this year because there is not the overwhelming outcry from the public.

Knowing how well Washington is working nowadays, I am concerned that many of these issues will not be addressed. Some of the more important provisions that are set to expire at the end of 2013 are the following:

  • Sales and use tax deduction instead of state income tax deduction
  • Deduction for higher education tuition expenses up to $4,000
  • Tax free IRA distribution to a charity of up to $100,000 for those who are at least 70.5 years old
  • Deductibility for mortgage insurance premiums
  • Direct expensing of assets (Sec 179 deduction)-reduced from $500,000 to $25,000
  • Bonus depreciation deduction
  • 15 year depreciation on qualified lease and restaurant and retail property
  • A number of energy incentives and credits
  • Health coverage tax credit

Boomer: What deductions and credits are especially important to know about for those on a fixed income?

Willey: Those on fixed incomes have to be concerned about the impact that additional income has on the taxability of their Social Security and the deductibility of their rental losses. Large capital gains can push incomes over the limits for the phase outs of itemized deductions and exemptions as well as pushing higher income taxpayers into the new higher income tax rates and the Medicare surcharge tax.

Another unforeseen issue may arise for seniors on Medicare. A bump in income (one-time capital gains) can increase their Medicare premium substantially for the following year because the premium is based on adjusted gross income. It often comes as a surprise because it does not show up on the tax return, but it is billed as an increased premium paid throughout the following year.

The deductible medical costs now must exceed 10% of adjusted gross income -- not 7.5% as in prior years. This change may make it more difficult to get a medical deduction. You may want to consider bunching deductions in the year that you will meet the limitation.

Boomer: Will boomers tax rates change for 2014?

Willey: Many of the tax rates and brackets will be indexed for 2014 as well as the phase out limitations. Not all are indexed so you need to check as to what the changes are. The taxable wage base for Social Security will go up from $113,700 to $117,000 so boomers may be paying more in Social Security taxes if they hit the maximum.

Boomer: What should we know about the gift tax exclusion differences between 2013 and 2014?

Willey: Right now, the gift tax rules allow certain gifts of up to $14,000 per recipient. The annual gift tax exclusion will stay at $14,000 for 2014 after going from 35% in 2012 to 40% in 2013 and beyond. The unified estate tax credit used against the estate tax has gone from a value of $5.12 million in2012 to $5.25 million in2013 and will be $5.34 million in2014. One of the items that the IRS is looking at is the transfer of houses from parents to kids. The IRS is finding that very often gift tax returns have not been filed on these transactions. They should be filed.

One way to get around the gift tax ceiling is to pay tuition and medical expenses for others. The IRS doesn’t view these as gifts – only if you make payments directly to the institution, not to the person who would benefit from the money. So, for example, if you’d like to pay a grandchild’s college tuition, you would need to write the check directly to the school he or she attends.