This post is part of our series for advisors to pass to their clients. Knowing more about your clients’ needs will help you to better serve them. Aging doesn’t have to be scary, and we here at Ashar want to help you provide the resources that policy sellers need to flourish in this chapter of their lives.
Ah, December: the month of holiday cookies, festive parties, gift wrapping, family gatherings...and taxes.
Although the tax deadline isn’t until April of next year, the year-end is when financially-savvy earners and retirees take a good look at their income for the year and start making estimates on how much they’ll owe Uncle Sam.
This can be especially important for new retirees. Doing your first year of taxes as a retired person can be a bit confusing, and you don’t want to end up with a huge tax liability that you could have reduced, had you only known what to do. Your financial advisor can walk you through the best ways to reduce your tax bill - since he or she knows you and your finances personally, your advisor can ensure you use the most effective strategies for your situation.
But if you want to get started on your own, there are a few things that most retirees can benefit from doing. Here’s a quick list of things to look into as the year draws to an end.
Take stock of your income and expenses for the year
For retirees, it’s especially helpful to know what your expenses were for the year, as you’re living on your retirement fund (unless you’ve decided to spice up retirement by starting a business or taking a part-time job). By calculating those expenses along with any money you brought in during the year from Social Security, stocks, bonds, etc., you can get a pretty good idea of what you’ll owe come April.
If you haven’t been keeping up with your quarterly payments, or haven’t been paying enough, you can then decide how to manage that tax shortfall - some specific ways are outlined below.
Consider strategies to reduce your tax bill
Everyone’s heard of making charitable contributions at the end of the year in order to reduce a tax liability, but there are several other things you can do, too.
For example, in addition to (or instead of) making a cash donation, you could donate appreciated securities to a charitable trust. This can decrease your taxable income by reducing the gains from your brokerage account.
Another option has to do with your required minimum distribution, or RMD, which is the amount you’re required to withdraw from your IRA each year. Not taking your RMD brings fairly substantial penalties, so you want to make sure talk to your financial advisor about how to avoid these penalties.
They can help you explore various options, like donating your RMD to charity, or withdrawing it and then withholding 100 percent for taxes. This can help you in the event that your quarterly payments haven’t been as much as they should be.
Calculate your medical expenses for the year
Another important financial category for retirees to consider is medical expenses. If your medical expenses have increased, or you’ve had to travel for surgeries, treatments, or appointments, you may reach the threshold for deductions.
Analyze your assets
While this won’t help you much this tax season, the end of the year is a good time to really survey your assets and decide whether you’re holding on to things you no longer need.
Are you paying hefty property tax on a house that’s bigger than necessary? Do you and your spouse still need two cars, or would one realistically work? Do you still need that life insurance policy that you’re paying a high premium on? Maybe selling it on the Secondary Market as a life settlement would better serve you at this stage of life. Doing so will provide you with a lump sum of cash that you can then invest or spend as you see fit.
The end of the year gives us all a moment to take stock of things - our goals, accomplishments, things we need to improve, whether we’re living up to the standards we’ve set for ourselves. Amidst all this soul-searching, make sure you set aside a little time to look at your finances so you’re prepared once tax time hits.
And if a life settlement is something you’d like to look into, ask your financial advisor to contact Ashar today!