The federal government has hit “unpause” on a tax break for retirees that allows you to reduce your tax liability by donating to charity.
So if you’re retired and over the age of 70, you can count on the IRS rewarding your generosity with a little of the agency’s own.
With some planning, along with using a reliable tax software program, you can set yourself up for a smaller tax bill next year.
Here’s how the tax break works along with some other retiree tax benefits you’ll want to know about.
What is this tax break?
Qualified charitable distributions make it possible for taxpayers over the age of 70 to reduce their taxable income by donating some of their federally required withdrawals from their individual retirement accounts (IRAs) to charity.
That means while you’ll have to forfeit the standard charitable contributions deduction, the qualified distribution comes out of your taxable income, working like an above-the-line deduction.
And you can take advantage of this tax break while still taking the standard deduction on your federal tax return.
How do you take advantage of this tax break? You can either write a specific charitable organization a check from your IRA account or set it up with your administrator to send the funds to your chosen charity directly.
You can contribute up to $100,000 to registered charities each year.
Who will be affected by it?
The group who’ll most benefit from the return of this tax break are those who are 72 years old and up.
Once you hit 72, if you’ve got an IRA, the IRS requires you to start taking required minimum distributions and paying tax on the money.
How much you’ll have to take out each year depends on the balance of your account and your age. As you get older, you’ll have to withdraw more because your limits are based on your life expectancy.
While qualified charitable deductions didn’t technically go anywhere, the Cares Act in 2020 did away with required minimum distributions for the year. So because you didn’t have to take out money from your individual retirement account, reducing that tax liability didn’t pack the same punch in 2020.
Other tax breaks you should know about
Getting older isn’t for the faint of heart. Here’s a list of some tax breaks and tax credits you should be sure to take advantage of. You may even want to consult a professional financial planner to ensure you’ve set yourself up for success or haven’t looked over any other benefits or credits.
A larger standard deduction
For your 65th birthday, the IRS gives you a larger standard deduction than the average taxpayer. If you are turning 65 in 2021, your standard deduction limit bumps up to $14,250, while 64-year-olds are only entitled to deduct $12,550.
That extra $1,700 means more older taxpayers are likely to opt to take their standard deduction rather than go through the effort of itemizing. And that additional boost should help you save at least $400 if you’re in the 24% tax bracket (making more than $86,375 or $172,750 for married couples).
Spousal retirement plan contributions
Once you’ve retired, you’ll generally have to stop contributing to your IRA. But there’s an exception: If your spouse is still working, they can contribute up to $7,000 a year to your IRA.
As long as your spouse has enough income to swing making contributions to both your accounts, you can use this option to prevent a little more of your household income from being taxed.
Time your tax payments in your favor
When you were earning a paycheck, you probably grumbled about those deductions that ate up a sizable portion of your pay. Well, now that you’re retired, you still owe the IRS a chunk of your income, but you may have to pay it directly.
If you receive regular payments from a 401(k) plan, company pension or IRA, the payer will usually withhold tax unless you explicitly tell them not to.
Opting to withhold the tax means you don’t get a big bill come tax time, instead you set aside what you owe over the course of the year as it comes in. That helps make your tax owing on your return a more manageable sum.
Disperse your requirement minimum strategically
You may not need your IRA funds day to day, but after 70, you’re required to take out a minimum yearly amount. If that’s the case for you, you may want to consider strategically withdrawing your funds.
You can do this by holding off on taking out the required amount until December and ask your IRA sponsor to hold back what’s owed to the IRS, along with any other tax liabilities you may owe the agency.
Setting your family up for success
Part of retirement planning is thinking ahead to provide your family with financial support for when you’re gone.
Affordable life insurance is an important part of that strategy, but you’re probably planning to leave your loved ones more than just an insurance policy. There are a few other things you can do to ensure more of your estate ends up in their pockets rather than the government’s coffers.
The IRS’s gift tax exclusion means you can give up to $15,000 to each of your family members without having to pay tax on it. That amount doubles if you’re married, meaning you can give away up to $30,000 to each of your children, grandchildren or other relatives every year that won’t be subjected to an estate tax after your death.