If you retired or plan to retire in 2020, there are a few special opportunities for some smart moves that could save you money at tax time, next April. And of course, there are also some tried – and – true principles to keep in mind regarding your retirement income and financial planning. Let’s take a look at both the new and the old ideas that can add up to more money in your account after you file your return for 2020.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020 allows you to skip your required minimum distributions (RMDs) from traditional IRAs, traditional 401ks, and other tax – favored retirement plans for 2020. You might recall that in 2019, the SECURE Act raised the age for mandatory RMDs to 72 from 70 ½. But even if you’re already 72, this year you aren’t required to take your RMDs if you don’t need them to maintain your retirement lifestyle. That means less taxable income — and a lower tax bill.
This tip won’t work for everyone, but for those who have the option to relocate, it could make sense to move to a state with no income tax or other tax – friendly characteristics. Not only that, but if you receive retirement benefits earned in one state, but your residence is in a different state, your state of residence is barred by Federal law from taxing benefits earned in the other state. For example, if you receive a teacher’s pension for service in New York, but you live in Connecticut, you would pay no Connecticut state income tax on your New York pension.
You can utilize investment losses to offset gains in other areas. By strategically utilizing tax – loss harvesting, you can book a paper loss in your portfolio, repurchase the asset (subject to certain time requirements), and use that loss to offset capital gains in other parts of your portfolio. This reduces the tax due from capital gains and you can even use excess losses (up to $3,000) to offset ordinary income.
If you don’t require your Social Security benefits at full retirement age — 67 for those born in 1960 and later — you can defer receiving them until age 70. Your benefit will increase for each year you defer, and Social Security benefits are not fully taxable, once you start receiving them. Also, you can structure withdrawals from other sources to minimize the amount of your Social Security income that is taxable.
These are just a few of the ways that retirees can save money on taxes for the 2020 tax year. At Shone Wealth Management, we specialize in helping our clients develop tax – efficient strategies for building and maintaining retirement income. If you have questions, we would love to speak with you about answers.
To read our related article, “The Ultimate Guide to Tax-Loss Harvesting and Rebalancing Mutual Funds and ETFs,” please click here.