Many retirees may be in for a surprise during this tax season, as they might end up having to pay more than expected in federal income taxes on their Social Security benefits. With the cost of living adjustment received by Social Security recipients in 2023, a higher monthly income could place some retirees over the threshold for having their benefits taxed. In addition, substantial gains in investment accounts in the previous year could also lead to a steeper tax bill in 2023 and for the 2024 return. Not all of the impressive gains reflect funds that are entirely yours to keep, as the dividends and capital gains on stocks and mutual funds from non-retirement accounts can carry tax liability.
However, there are several strategies that retirees can take to lower their tax liability. Making a contribution to an individual retirement account (IRA) can help to lower taxable income, thus reducing the tax bill. The limit on annual contributions to an IRA for 2023 is $6,500, and there is a catch-up contribution limit of $1,000 for individuals aged 50 and over. Contributions to an IRA can be made until the April 15 tax deadline. Additionally, contributing to a health savings account (HSA) can also benefit retirees, as the larger contribution maximum can could ramp up retirement savings with its triple tax advantage.
Retirees can also explore the option of itemizing expenses, such as unreimbursed healthcare expenses, if they exceed the standard deduction. For those age 65 or older, extra standard deductions are available that could save a bit more on 2023 taxes. Whether it’s making a strategic move with an IRA or HSA contribution, or taking advantage of extra standard deductions, retirees do have options to navigate the potentially larger tax bills this year and in the future. These strategic moves can help to reduce taxable income, thus minimizing the tax liability and saving more money in the long run.