Top Ten Tax Questions For Retirees In 2023

Plan With The Tax Man

Retirement can come with a lot of tax questions and concerns. From understanding the tax implications of withdrawing from your retirement accounts to minimizing taxes on investment income, it can be overwhelming. On today’s episode, we’ll break down the top ten tax questions retirees are asking in 2023. Before you file your 2022 taxes and plan ahead for the rest of the year, make sure to listen to this episode as we’ll discuss some important tax questions that retirees should ask themselves to ensure they're making the most of their retirement savings and minimizing their tax burden.

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Transcript Of Today's Show:

Speaker 1: Welcome into another edition of Plan With The Tax Man with Tony Mauro and myself, here to talk about the top 10 tax questions for retirees, 10 or so, somewhere in that neighborhood, for 2023. I mean, hey, it makes sense to go ahead and have this conversation with Tony. It's Plan With The Tax Man for Pete's sake. We got to get into that conversation with him. Tony is a CPA and a CFP, an EA of 27 plus years in the industry. We're going to go through this. Right of fact, it's right in the middle of tax time. We're taping this on Valentine's Day. Hopefully everybody has a good Valentine's Day. It is getting ready for tax time, but Tony, let's break down a few of the top questions and just help folks with a few things to think about to get themselves ready for not just the annual tax prep, but also the actual year long tax planning and things as we move further through retirement, not just the history look of that thing. How you doing my friend?

Tony Mauro: I've been doing good. You say Valentine's Day today and-

Speaker 1: That's right.

Tony Mauro: Got a lot of people coming in, dropping off their taxes. Now that everybody's starting to get most of their documents, their focus is-

Speaker 1: Oh yeah.

Tony Mauro: And of course we just had the Super Bowl. With all the ads on the Super Bowl, everybody's thinking about it now all the sudden.

Speaker 1: Yeah. True. Very true.

Tony Mauro: Busy.

Speaker 1: And in what you do, because you have both sides of the coin really, because you are a financial planner as well as a CPA, you look at really this stuff through multiple lenses, which I think is a nice benefit as well. And tax prep is that annual thing, but most CPAs look at, that's history, right? It's like the year-

Tony Mauro: That's right.

Speaker 1: That was. Whereas I think working with someone who does financial planning and the CPA, they're not only taking care of the past year, but they're really looking at how things are going to affect future years. So let's dive in, talk about some of that from that aspect. Let you give us, 'cause there's a lot of them here so we'll see how many we can get through, but tax implications of withdrawing money is number one from different accounts. This is important because we talk about bucket strategies. People are used to hearing that. Well there's also kind of tax bucket strategies if you will.

Tony Mauro: Yeah there is and all of these things we're going to talk about I would caveat right off the bat is to make sure, especially as a retiree, you're talking to your advisor, whether it be your financial advisor, your tax advisor, or both.

Speaker 1: Right.

Tony Mauro: 'Cause all of this really can affect your taxes negatively if done improperly, which I have seen a lot, but taking money out of retirement plans, the IRS doesn't make it easy for us 'cause they have different rules for almost everything.

Speaker 1: Right.

Tony Mauro: And depending on which type of retirement plan you take it out of, for example, say you're starting to pull money out of your 401k and it's just a traditional 401k, that money's never been taxed. So that's going to be added to your taxable income, which you're probably not going to have any penalties on it if you're above 59 and a half, but you want to make sure that you're not just blanketly pulling a bunch of money out and then you've got other money coming in as well and all the sudden you got a huge tax bill. That's the other thing. A lot of this leads to surprises at tax time if not done properly. So you have to pay attention to that 'cause the 401ks are different than the roths. They're different from just pulling money out of a taxable type of investment account, things like that. All of this should be taken into account with some tax planning.

Speaker 1: Well how you, and where you, pull money from is going to affect number two, which is social security benefits being taxed. People still get very confused by this. So can you explain to us some of the rules on this, on how it works because this is a thing. It can happen.

Tony Mauro: It can happen and a lot of people get confused on them reducing your social security versus taxing your social security. And so if you are full retirement age, and it depends on all of us now or depending on when you were born, but once you're full retirement age, they can't reduce your benefits, but they can and will tax it depending on how much other income you have coming in from other sources like we just talked about in number one or maybe you're still working, things like that. So what happens is is in a nutshell, if you make a little too much money from other sources, then all the sudden they have this kind of backdoor tax, they start taxing your social security. They're not taking your social security, it's just like income. They're just taxing it. The tax is not 100%. So it isn't like you're being robbed completely, but it does make a difference because a lot of people aren't withholding anything from their social security benefits. And then if they add it to their income, then all of the sudden, again, they have that surprise tax bill and they're asking us, "Well, hey, what happened?" And then we say, "Well your social security, part of it's being taxed or they can tax all the way up to 85% of it."

Speaker 1: Yeah.

Tony Mauro: Again, people get confused, "Oh, my God. My tax rate's 85%." No. They're just taxing 85% of the benefit at whatever your tax rate is.

Speaker 1: Right. And so it's based on income. So how you're pulling money out of your other retirement accounts. So there's ways to be strategic so that we're not getting too crazy and not hitting that highest number on social security, right?

Tony Mauro: That's correct. There's different ways to pull money out and then at least fill up certain, well we call them tax brackets or buckets because-

Speaker 1: Yeah.

Tony Mauro: Unfortunately for us, there isn't just one tax rate. For every filing status there's five to seven. And so it's very easy to jump into the next one and then get a bunch of money taxed at a little higher rate. So-

Speaker 1: Yeah.

Tony Mauro: That's where the planning comes in is trying to maximize that.

Speaker 1: Yeah. I think most people still get confused by that too. If you're, let's say, in the 22% tax bracket, not every dollar you have coming in is at 22%.

Tony Mauro: It's not.

Speaker 1: It's incremental. Yeah.

Tony Mauro: Yeah. It's incremental. And so you got your marginal tax rate, which is the tax on the next dollar you receive. And then your effective tax rate's kind of the average. But even for somebody that's single, let's say, the top 22% rate's about 89,000 for '22, but anything over that, any dollar over that, then everything's 24 and then it jumps all the way up to 32.

Speaker 1: Yeah.

Tony Mauro: So it can get taxi in a hurry.

Speaker 1: Yeah. Gets heavy. Yeah. It starts to hurt.

Tony Mauro: Yeah.

Speaker 1: All right. Number three, taxation of pension. Is that different at all? Is there anything for folks to think about there or know there?

Tony Mauro: Well, again, it's a technical thing depending on what type of pension you have.

Speaker 1: And some states waive this, right? Depending on where you live, yeah.

Tony Mauro: Iowa now on the state level is not taxing pension income for retirees. Yeah. They just passed this, by the way, for '23 and beyond. I think it's a way to, because they always tax retiree income before maybe to try to keep people here in their retired years. But, some of it though is even taxable at the federal level. For a lot of our big pension, which here is IPERS, some of distribution is taxable at the federal level and some of it is exempt. And of course that's up to IPERS. They figure all that out for you, but if some of it's taxable at the federal level, again, you've got that same deal of now all the sudden we got to make sure that we're not getting a tax surprise and we don't have enough withheld from our pension incomes.

Speaker 1: Okay. All right. Number four, the Secure Act, the first time, and also the Secure Act 2.0 passing. Anything there that could affect income and taxes? Obviously they moved the RMD age so it does-

Tony Mauro: RMDs, yeah.

Speaker 1: Give you a little bit of wiggle room for some other strategizing. Anything there you want to enlighten us on?

Tony Mauro: Well, I've been talking to a lot of people about the RMDs with the Secure Act, which I think for a lot of my clients really is going to benefit them 'cause a lot of them don't really need or want to start taking the money out. And so if they can postpone it, I think that's an advantage, truly of course. I think too though, they've changed some things with the Roths and some incentives to participate, but as far as retirees go, I talk to them mostly about possibly deferring some of this and keeping it growing a little bit longer if they can.

Speaker 1: Yeah. I know there's lots of different little things in there. So it's certainly wise to. And since the Secure Act 2.0 is still pretty new and they're still trying to decipher a ton of what they put in there, it's certainly worth making sure that you talk with your financial professional and CPA as to anything that might change for your scenario. Any special tax deductions or credits that are available for retirees at all?

Tony Mauro: Well, they are and backing up to the Secure Act, I think we were talking about last time possibly doing a podcast on that 2.0 Later in March, April, once kind of some of this dust settles.

Speaker 1: Yeah, we can do that.

Tony Mauro: It can get technical, but we don't want to get too far off in the weeds with it, but something to think about, but tax deductions or credits for retirees, there are some. The tax deductions, of course, a lot of retirees, depending on what their other income is, they have a lot of out-of-pocket medical. They are paying for a lot of supplemental health insurance that we see, at least in our client base, is enough to trigger deductibility on some of that. So we always tell them to make sure that they're keeping track of that, where the younger people, they can't get over the thresholds very much. There's those. There's some credits if you're disabled. Oh, of course if you're blind and things like that that you might be able to take advantage of. Again, if you're even remotely asking, I wouldn't be afraid to ask your advisor. It doesn't matter if you think it's kind of ridiculous. There could be some deductibility there. So I would definitely ask if you've got some kind of situation.

Speaker 1: Yeah. And they increased the standard deduction, correct, for '22?

Tony Mauro: They did again based on inflation here, just looking at that. For married filing joint now it's up to 25,900. You do get an additional 1,404 if you're 65 or older. So that kind of bumps it up a little bit for you too.

Speaker 1: Gotcha.

Tony Mauro: It's theirs and same way with being blind, but I think the biggest thing that we see besides that of course would be the medical for most of them. Another one too, I don't even know if it's on our list. Let me look down. Yeah it is. It's actually number eight, but we could talk about it a little bit 'cause a lot of retirees like to make contributions to charity. It seems like moreso than maybe the younger people. And so I always encourage them to keep track of that, both cash and non-cash because-

Speaker 1: Yeah.

Tony Mauro: They do add up and a lot of them are very, very charitable.

Speaker 1: Yeah. Tax benefits for charitable contributions also. QCDs, which could help you with your RMD, satisfying that goal. So yeah. That was going to be on the list so that's good you touched on that one as well. So that's certainly something you could look at. How about moving? So that's another one to consider. So maybe if you're getting close to retirement or maybe this is the year you were going to retire and you're considering, or maybe it's next year, and you're considering moving, I don't know if I would let the ultimate decision be that I'm moving to, let's say, Florida just because the tax is different. I'd be going because I'm cold and the tax is different.

Tony Mauro: Right. And the tax. It's an added bonus.

Speaker 1: It's an added bonus, but it is something to consider.

Tony Mauro: It is. And again, Iowa is now, of course I've been here all my life, but now all the sudden it's a little more attractive as a retiree, other than the cold, is that you've got this non-taxability of retirement benefits, which for most retirees, it's like a state like Florida. Now the difference is any earned income in Iowa, if you're retired, you're still going to pay taxes on that. Whereas Florida and some of these states with no state income tax don't have that. So again, you got to kind of take a look, weigh all the options there.

Speaker 1: Okay.

Tony Mauro: Because I don't know. A lot of retirees in Iowa, they kind of just work for what I call mad money to have, and here that still is taxable, but without having their retirement income taxable and social security now they're still kind of elated, but it is important.

Speaker 1: Yeah.

Tony Mauro: Yeah.

Speaker 1: Yeah. Something to factor in there. I think they're going to get their dollars one way or another. You think it's like, "Hey, I'm moving to this state 'cause there's no income tax," but it may have a higher cost of living or it may have different kinds of things. A friend of mine moved to Colorado and he's like, "Wow. I can't believe how expensive it is out here." And it's just some of the little things that he was surprised by like tagging his vehicle and the insurance on the car. There's massive difference versus his prior state. So always little things to consider in there. Let's see. We're talking about charitable contributions. What about gifting money? Any tax considerations there if you want to gift money to kids or grandkids?

Tony Mauro: Yeah. This is an area another, just like social security, I think with a lot of confusion. People always ask, "How much can I gift to my kids without paying income tax?" And I say, "Well, if you really want to know, the threshold's extremely high," because they kind of confuse the gift tax exemption every year, which I believe is like 16,000, but I got to refer to my charts-

Speaker 1: I think it is. Yeah. I think it's either 16 or 17 that you can give per person. Yeah.

Tony Mauro: Yeah. So I tell them, I said, "Well, you can gift that much per person to avoid the have to file a gift tax return." But all the gift tax return really is is a filing of the return telling the government that you used up a little bit of your lifetime exemption, which I believe is for a married filing joint about 22 million.

Speaker 1: Yeah. It's crazy high right now. Yeah.

Tony Mauro: It's very, very high. And considering, yeah. Here it is. I finally found it. So the gift tax for '22 is 16, '23 it's 17,000 that is. So for most, what we tell them is that if you and your wife want to gift your son and his wife say money, you each could gift them, each one of them, 16,000 or 17,000, it's 34 a piece. So you're talking about a lot of money. A lot of people can't gift that much-

Speaker 1: Right. Yeah. That's pretty hefty. Yeah.

Tony Mauro: In one year. But even if you go over that, you've got some farmland or something like that, you want to gift them $200,000, you're not going to pay any gift tax on it. We just have to file a return to keep in the good graces of the government and tell them you used that much, but-

Speaker 1: This could be a nice future strategy though, Tony, if you're looking to bring down your complete total net worth because of, let's say, because of RMDs, because of maybe converting money or just reducing the estate size overall, if that's part of the strategy, this could be a nice way to do a little bit of that too.

Tony Mauro: It is. If you've got somebody with enough of an estate to possibly have estate taxes later on, the gifting and using the annual exclusion amount is a great idea along with some other things 'cause you got to get some of this money out of your estate in order to escape that and a lot of people are very content with just gifting the exemption amount every year.

Speaker 1: Yeah. There you go.

Tony Mauro: At least trying to get it out of there.

Speaker 1: Right. Okay. We talk about individuals a lot. Sometimes we should do probably more for businesses considering you are a business, but any tax things to discuss real fast for small, maybe not even a business, but maybe retirees who go into a small or a side hustle. So they're in a retirement and maybe they're selling paintings or they're selling arts and crafts that they've made. Whatever tax ramifications you'd like to share with us from a small business or side hustle kind of thing.

Tony Mauro: I would say for small business, I would keep it simple. I wouldn't go into incorporating things like that unless all of the sudden really started taking off. A lot of people confuse doing something for a hobby with trying to make money and have a profit motive. In other words, they'll come in and say, "Well I've got this business. Here's all my expenses." And we say, "Well, where's the income?" "Well I don't make any money." And I say, "Well, where's the sales?" "Well I don't even sell anything." "Well that's a hobby. You can't deduct that." So you got to have a profit motive. Not to say you can't lose money.

Speaker 1: Right.

Tony Mauro: And you can deduct that against other income, which is good. So if you are doing a side hustle, keep good records to see if you're making money or losing money. Obviously if you're losing money, it's a great tax deduction, but eventually if you're losing money, that's money going out the door.

Speaker 1: Right.

Tony Mauro: You certainly don't want to do that forever. But on the flip side, income-wise, it's going to be taxed and you will pay into social security, believe it or not, even if you're 75, 80 years old, you got to pay back in, which a lot of retirees don't like. You can escape it though with passive income like rentals.

Speaker 1: Okay. And speaking of, final one here, the number 10, any tax issues to discuss if you are looking, obviously a lot of people, the housing market went kind of crazy definitely last year. There was still a lot of things pretty high. Maybe if you sold your primary residence or something like that. Anything to consider or ponder?

Tony Mauro: Well I think the tax ramifications, here in Iowa for the most part, it may not be the same in some of the higher priced cities, but you can, for married filing joint, if you've lived in the home for the last five years, it's your primary residence, you can exclude up to $500,000 of capital gain before you have to start paying any long-term capital gains, which is still taxed better than income tax rates, but in Iowa, most people aren't making a $500,000 gain. And so they can get out of their home and take that gain and, well they can do whatever they want with it. The problem is now as prices are going up, when they move into something else, they kind of end up rolling the whole thing into something new, but at least you didn't pay tax. But, like you were saying though, if you're downsizing, that's when it's better. I sell my home for 700,000 and I paid 250 way back when-

Speaker 1: Right.

Tony Mauro: And all the sudden I got a $450,000 gain and I can go out, I got 700,000, and I can go out and buy something smaller for 350. Yeah. That extra money could go in my pocket and never pay taxes on it, which is a nice deal. That's been around, I don't know, maybe 10, 15, 20 years now, but that never used to be the case. You always had to pay tax when you sold something.

Speaker 1: Okay. So a lot of little things to think about. Again, it's all part of strategizing for just not only the past year, but also future years into retirement. So as usual, if you've got some questions and you need some help when it comes to how to get a tax strategy, to get a retirement strategy in place, make sure that you're reaching out to a qualified professional like Tony and his team. They are Des Moines Professional Alternative, excuse me, at Tax Dr. Inc. And you can find them online at yourplanningpros.com. That's yourplanningpros.com.

Don't forget to subscribe to the podcast Plan With The Tax Man on Apple, Google, Spotify, all that good stuff. And again, if you need some help, reach out to tony at yourplanningpros.com. Buddy, thanks for your time. Appreciate you.

Tony Mauro: Yeah.

Speaker 1: I'm going to let you go 'cause it is Valentine's Day, so I hope you guys have a great day.

Tony Mauro: All right. You guys do the same. Let's talk to you soon.

Speaker 1: We'll see you next time right here on Plan With The Tax Man, with Tony Mauro.

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