While taxes support many necessary programs, like police and fire departments, no one wants to pay more than their fair share. When you have reached retirement and life on a fixed-income, you may become even more interested in ways to reduce your tax burden. Working with a Certified Public Accountant (CPA) or tax professional is often the best way to learn about important tax breaks, but you can also research some tax-saving strategies on your own.
Choose Tax-Friendly Retirement Destinations
When talking about taxes, most people think about paying their Federal and State income taxes. However, other taxes, like sales tax and property tax, can quickly add up throughout the year. What’s more, these taxes can be assessed at both the state and local level, which often means a big difference when you live (or shop) in different areas.
One way you can reduce your overall tax burden is to seek out more tax-friendly retirement destinations. Each year, financial experts like those at Kiplinger or Money Magazine put out their own picks for the best and worst places to retire. These choices typically look at a mix of state and local income tax, sales tax, and property tax, as well as any extras like estate or inheritance taxes.
Consider Retirement Income Taxes
One big consideration is how a state taxes retirement income. Most states do not tax Social Security benefits, but some do. Some states, like Mississippi, do not tax any qualified retirement income, while a handful of states (including Texas, Nevada and Florida) have no income tax at all.
Property tax is another important issue to keep in mind before relocating, as some states offer homestead exemptions or other credits to qualifying retirees.
Check Sales Tax
When it comes to shopping, sales tax can vary widely from one area to another, especially when you tack on both state and local taxes. Many states have items that are exempt from sales tax, such as groceries and prescription drugs. There are five states which have no sales tax: Vermont, Delaware, Montana, Oregon, and Hawaii.
Reduce Your Taxable Income
Without relocating, there are other strategies you can use to reduce your tax burden. Often this comes down to reducing your taxable income, increasing your tax deductions and taking advantage of available tax credits. When filing your tax return, the amount you pay will be based on your Adjusted Gross Income (AGI). If you haven’t yet retired, you can reduce your AGI through contributions to employer sponsored 401(k) plans, and, even after retiring, you can contribute to saving plans like IRAs.
Take Advantage of Tax Credits
You can also lower your tax burden by taking advantage of any available tax credits, such as the Lifetime Learning credit if you are taking college classes. For most homeowners, increasing tax deductions is the easiest way to reduce the income tax burden. Some important deductions that apply to many retirees include medical and dental expenses, charitable contributions, investment expenses, and business expenses for those who are self-employed or working as consultants.
Active adults who no longer have mortgage payments may opt to skip itemizing and take a standard deduction, which is higher for those 65+. For more specific advice, consider consulting a CPA or tax professional. He or she can give you advice tailored for your current situation or help you plan a retirement relocation.