Many retirees may face larger tax bills this year (and next), but there is 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 beneficiaries received a higher cost of living adjustment (COLA) of 8.7% in 2023 — an average of $140 more per month. This extra padding could push them over the income threshold that makes their benefits taxable.
And while we were all happy to see the balances in our retirement and non-retirement investment accounts balloon last year, that also translates into a potentially steeper tax bill for 2023 and your 2024 return.
Slowing inflation, a strong labor market, and the attractiveness of the future with low interest rates have made this a good year for retiree investments. The S&P 500 finished the year with gains of more than 24%. The Dow Jones Industrial Average rose more than 13%, and the Nasdaq swelled 43%.
But before you fiddle with your account data, remember that these winnings are not all yours to keep.
“You should be aware of the tax exposure you face in your non-retirement accounts, such as stocks and mutual funds,” Jeffrey Mellon, executive wealth management advisor at TIAA, told Yahoo Finance. “The dividends and capital gains you receive from these investments carry a tax liability. While most people are concerned with their rate of return — which is, of course, important — it’s more important to know how much of that return you can keep.”
Here are three basic but effective ways to lower your tax liability on your 2023 returns.
Full coverage: Taxes 2024 – Everything you need to file your taxes on time
Make an IRA contribution
Putting money into an individual retirement account reduces your taxable income, which could mean a lower tax bill.
“A number of my clients who are retired or their spouses have part-time jobs or do some consulting work to keep themselves busy,” Meloni said. “Most of these part-time jobs do not offer 401(k) or retirement benefits, but you are still entitled to make IRA contributions. This would allow you to reduce your total income on your tax statement.”
For tax year 2023, the maximum annual contributions to an IRA are $6,500. The maximum catch-up IRA contribution for individuals age 50 and over is $1,000. You have until April 15 to make a tax-deductible contribution for 2023.
Read more: These are the limits of the new traditional IRA and Roth IRA in 2024
Contribute to an HSA account
In general, you can continue to contribute to a health savings account (HSA) as long as you are not yet enrolled in Medicare and covered by a high-deductible health plan.
While these accounts are not a replacement for a traditional retirement account, a larger contribution maximum can increase your retirement savings with a triple tax advantage. It’s the only account that lets you deposit money on a tax-free basis, lets you build it up tax-free, and lets you take it out tax-free for qualified health care expenses.
Consider making an HSA contribution for tax year 2023 if you fit these criteria, Madison Sharik, a certified financial planner in Pittsburgh, told Yahoo Finance.
You can contribute up to $3,850 to an HSA for self-only coverage. Those 55 and older can contribute an additional $1,000. Just like IRAs, you can contribute to an HSA until the April 15 tax deadline.
“The good news is that HSA contributions are deductible even for high-income earners,” Sharik said.
Read more: HSA contribution limits for 2023 and 2024: Here’s how much you can save
Take the extra standard deduction — or itemize it if that helps you
One of the most common sources of itemized expenses that exceed the standard deduction for retirees is unreimbursed health care expenses, Sharik noted.
“See if there is an opportunity to itemize expenses in excess of the standard deduction, especially medical expenses, with your tax filing,” Sharik said.
For tax year 2023, the standard deduction is $27,700 for married filers filing jointly ($13,500 for single filers) so any itemized deductions above that amount will provide a tax benefit.
John A. said: “For the medical expense deduction, you have to have deductions over a certain threshold to get the benefit,” Henderson III, a financial planner at Bailey Wealth Advisors in Silver Spring, Maryland, told Yahoo Finance. “If you spend an unusual amount of time in the hospital or have more health care events than usual, you may be able to write off qualified, unpaid medical expenses that are more than 7.5% of your adjusted gross income.”
If you’re 65 or older, you can save a small portion on your 2023 taxes by taking an additional standard deduction of $1,850 if you’re single or filing as head of household. If you’re married and filing jointly or separately, the additional standard deduction is $1,500 per qualifying individual. For filers who are 65 or older, the additional standard deduction is higher than the regular standard deduction for a given tax year.
If you’re 65 or older and blind, the additional standard deduction is $3,700 if you’re single or filing as a head of household. It’s $3,000 per eligible individual if you’re married filing jointly or separately.
“While these benefits may not be enormous, they may allow you to keep more money in your pocket,” Henderson said.
Kerry Hannon is a senior columnist for Yahoo Finance. She is a workplace futurist, career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in the New World of Work and “You’ve never been rich.” Follow her on X @kerihannon.
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