Depending upon combined income, Social Security may be taxable. For example, higher income couples filing jointly with a combined income of $44,000 and above would have up to 85 percent of their Social Security income taxed. Middle-income earners with a $32,000 combined income will have up to 50 percent of their Social Security income taxed and lower-income married couples filing jointly would have none of their Social Security income taxed. Keep in mind that these percentages are the portion of Social Security that would be subject to the tax rates, not the tax rate itself.
4. Manage tax brackets and deductions. Certain clients may want to manage their income tax bracket to make just enough to stay in a lower bracket. For example, married couples filing jointly with taxable income below $75,300 will stay in the 15 percent tax bracket, but if they earn income above that up to $151,900, they move up to the 25 percent bracket on the excess taxable income over $75,300. One tactic that may work for clients between the ages of 59 ½ and 70 who are trying to manage their tax bracket would be to take money out of their IRA prior to when they need to take their RMD. This fills the income tax bracket early and could create a smaller tax hit when they reach age 70 ½.
An additional retirement income issue that may arise for high-income boomers is the possibility of phasing-out of certain deductions. In its simplest terms, if clients make too much money, they could lose up to 80 percent of their itemized deductions. For these clients, it will be important to find ways to reduce and manage taxable income as appropriate.
5. Track medical deductions. A final tax tip is to remind boomers to keep track of all medical expenses—they may be deductible. Those age 65+ with medical expenses that exceed 7.5 percent of their adjusted gross income are eligible for deductions. In some situations even mileage can be deducted. They may also “bunch” medical expense deductions, when possible, to reach the floor that applies to them. A tax advisor could be a good resource to help with this strategy.
Having the right conversations will help your original boomer clients be more prepared to make sound decisions with their income and taxes. You can help ensure these clients are confident in their financial strategy as they continue to lead the way into retirement.
Deb Repya is vice president of advance markets for Allianz Life Insurance Company of North America.