People who are moving into the retirement phase of life often rely on the fact that their tax bills will go down at this time. However, this isn’t the truth for many people in Arizona and other states. The field of tax law is constantly changing, making it hard to keep up with what to expect.
In addition, some retirement-age individuals fail to plan enough for the next phase of life. Thankfully, it’s easy to avoid this mistake. An experienced Tucson tax attorney can help you with tax planning tips that let you take advantage of tax breaks upon retirement.
Reasons Some People Don’t Get a Retirement Tax Break
There are multiple reasons why an individual entering retirement might be wrong about their expected tax deductions, and some are more obvious than others. Keeping these things on your mind as you move toward retirement can help ensure you enjoy these years without worrying about your tax liability.
Limited Tax Deductions
In many cases, the credits and deductions available to someone before retirement disappear after this life change occurs. For instance, many retirees will have paid off their mortgages before retiring, so there’s no way to claim that as a deduction. Also, without children as dependents and no money going into a 401(K), it may turn out that all of your income is taxable.
Increasing Tax Brackets
Tax brackets are very low right now compared to how they have been in the past. This is a good thing currently, but you should consider how this might affect you when it’s time for you to retire. Medicare, Medicaid, and Social Security are all unfunded liabilities and as time passes, tax brackets will likely rise in future years.
Maintaining Standard of Living
If you expect to have the same standard of living during retirement, it stands to reason that you will need the same amount of monthly income. However, once you retire and stop working, you won’t bring in the same amount as before. In addition, if you plan to travel or engage in new hobbies, this can also increase your expenses.
Creating a Successful Tax Plan
Now that you know what to watch out for, it’s time to start creating a strategic tax plan with the help of a Tucson tax attorney. There are many ways to make things easier on yourself once you retire. Two of the most common are listed below.
After-Tax 401(K) Contributions
Many people don’t know that making after-tax contributions to a 401(K) is possible even if you have maxed your pre-tax contributions. The after-tax amounts can be rolled into a Roth IRA. This is a beneficial option that builds a reserve of tax-free money to use during your retirement.
Health Savings Accounts
A Health Savings Account (HSA) is a tool used to help cover medical expenses. It can also be used as a flexible savings account that doesn’t expire or an additional savings fund for retirement.
In addition, an HSA offers several special tax breaks. The contributions are free from income taxes, the money grows tax-deferred, and funds can be removed without taxes for medical expenses.
On top of that, a large number of employers contribute some amount to the HSA each year. So while you will need to pay taxes on the money you withdraw, the typical 20% penalty for spending on non-qualified medical expenses will not apply.
There are many other options for retirement tax planning, which are often based on your specific situation. That’s why you need a Tucson tax attorney who can guide you through the process. Call us at Guardian Tax Law to schedule a free, no-risk consultation with one of our expert tax attorneys.