Retiring soon? Congratulations! Certain changes in the tax code affect your income taxes as you retire, including healthcare deductions and Social Security distributions. If you’re a business owner, other changes can affect how you plan your succession and the potential sale of your business. Below are some considerations that could determine how much of your hard-earned money will stay in your pocket for your retirement years.
It could pay more to downsize. Now that the Tax Cuts and Jobs Act (TCJA) has capped state and local taxes (SALT) at $10,000, your property tax deduction doesn’t go as far as it once did. Being able to fully deduct high property taxes was once an incentive for retirees who owned high-value homes to stay put. But now with the relatively low cap, a downsize to a more manageable property could have added appeal.
How medical expenses factor in. As you age, there’s no doubt an increasing amount of your income and savings will be spent on medical expenses. Taxpayers got a break on deducting medical expenses in 2017 and 2018 by being allowed to deduct medical expenses above 7.5% of their adjusted gross income (AGI). But in 2019, that allowance doesn’t kick in unless expenses exceed 10% of AGI. Still—as your income decreases and healthcare costs increase—you may have enough medical expenses to warrant itemized deductions.
Balance retirement benefits wisely. Receiving your full share of Social Security benefits is a delicate dance that few retirees get right. The age for full benefits eligibility creeps up every year (right now it’s 66 for those born in 1954 or before). The longer you wait (up until age 70), the more benefits you receive. That’s why we offer clients software assistance to maximize their Social Security benefits. At the same time, however, it’s important to follow the distribution rules for your IRAs and other retirement accounts. By age 70½, you need to take minimum distributions each year from traditional IRAs, SEP IRAs, and SIMPLE IRAs, or face a huge penalty: 50% on the amount not withdrawn. Roth IRAs don’t have a minimum distribution age, however, and the TCJA has loosened the restraints even further for high-income earners. If you’re retiring soon, talk to an advisor about your retirement funds and if changes need to be made based on these updates.
Asset sales could be a boon. The TCJA increases depreciation write-offs for qualifying business property (which includes furniture and equipment). Section 179 and 100 percent Bonus Depreciation each allow for the deduction of the entire cost of the asset in the year of purchase. These enhanced deductions begin phasing out in 2023, so it could be an excellent time for both you (as the seller) and your buyer to reduce your tax burdens. But be careful: The length of time you’ve held on to assets, whether you’re related to the buyer of the assets (as is common in a family business), whether your business is a corporation or a pass-through entity, and other factors can affect how much you may be taxed.
Your entity matters, but it’s subjective. With the tax changes, corporations are taxed at a relatively low 21% rate while many pass-through entities can claim a 20% qualified business income deduction. So which entity will set you up with the best retirement dollars? It depends on many factors. Unless you have been wisely planning your move for some time, changing entities right before retirement to reap the rewards of the sale can be risky business.
There are dozens of other considerations that can help you save tax dollars as you transition out of the working world. Feel free to contact us for a closer look.
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