Five tax tips for baby boomers

Baby boomers closing in on retirement may want to consider new strategies for their returns.
Published April 16 2016
Updated April 16 2016

Baby boomers are well-practiced in filing income tax returns, but their tax dollars can fly out the window if they don't pay attention to some specific rules that apply to retirees and others in their 50s and 60s.

Here are five different tax tips for boomers:

Never assume that your Social Security retirement benefits are tax-free.

All of your Social Security benefits won't be taxed, but depending on how much money you're generating in retirement, it's possible that up to 85 percent of your Social Security benefits could be included in your gross income and be subject to federal income taxes.

How much you pay in taxes will depend on the amount of benefits, other income (including tax-exempt interest from municipal bonds), and your filing status, said Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks 2016.

"If benefits are taxable this year, consider voluntary withholding to cover your projected tax for the future," Weltman said.

See form W-4V for a "voluntary withholding request."

Plan how much money you'd withdraw from a 401(k) in a given year, as well, so you might limit how much money is taxed from Social Security benefits every year while in retirement.

Keep an eye on the extra 3.8 percent tax on investments.

If you're looking at generating cash by selling off investment property, talk to your tax preparer first. Find out the potential impact of what's often called the 3.8 percent Medicare surtax in a given year. The tax can apply to net investment income of individuals, estates and trusts that have income above a set threshold.

What's officially called a net investment income tax went into effect in 2013. See form 8960.

Weltman said individuals need to pay close attention to what triggers the 3.8 percent surtax, particularly if they're selling a business, selling stock or maybe consolidating and selling a vacation home. The threshold amount for married filing jointly is a modified adjusted gross income of $250,000.

Once you hit your 70s, reconsider how you donate to charity.

If you are sitting on a sizable amount of money in your regular IRAs, consider taking your required minimum distribution by having money sent from an IRA to a charity. It's called taking "qualified charitable distributions."

In general, required minimum distributions must be taken each year beginning with the year you turn age 70 1/2.

If you make a direct transfer of money to a charity from an IRA, Weltman said, you're not seeing that distribution boost your adjusted gross income, which influences other tax breaks.

Get an extra break on medical expenses if age 65 or older.

Typically, you can only get a tax break for qualified medical and dental expenses once those expenses exceed 10 percent of your adjusted gross income.

But if you or your spouse is 65 or older, the threshold for medical expenses is 7.5 percent of your adjusted gross income.

If you're in your mid 50s, check into ways to avoid a 10 percent penalty from a 401(k) plan.

Money that you take out of a 401(k) plan can be subject to an additional 10 percent tax for early distributions, if you take that money out before reaching age 591/2.

But there are some exceptions that can help you avoid the 10 percent penalty. The 10 percent additional penalty, for example, does not apply to distributions that are made because you are totally and permanently disabled.

One of these exceptions applies to 401(k) plans, not IRAs.

If you stop working for your employer in the year you reach 55 or later, any distributions paid from your 401(k) to you after you stop working for that employer are automatically exempted from the 10 percent early distribution penalty, notes George W. Smith IV at George W. Smith & Co. in suburban Detroit. But if you rolled over that 401(k) to an IRA, you'd lose that exemption.