Although reform promises to reduce most projected taxes, limitations on itemized deductions will increase the need for individualized tax planning, especially for retired wealthy clients.

High-net-worth seniors can face wildly differing tax situations. Some states, for instance, exempt all retirement income from taxes; many exempt all Social Security income. Property and income taxes as well as taxation of income from pensions, 401(k)s and IRAs also vary. Thirty-seven states and the District of Columbia exempt all Social Security benefits from tax. Most states give seniors a break on property taxes and some don’t tax pension income.

“The first, most obvious break is that folks 65 and older receive a higher standard deduction,” said CFP Jim Blankenship at Blankenship Financial Planning in New Berlin, Ill. For tax year 2017, the extra amount is $1,250 or $1,550, depending on filing status. These figures jump to $1,300 to $1,600 in 2018.

“The IRS taxes from zero to 85 percent of Social Security benefits and permits an itemized deduction for medical and dental expenses exceeding 7.5 percent of AGI. Neither are technically limited to seniors … but seniors are common beneficiaries of both provisions,” said Joe Musumeci, a CPA with Rowles & Company in Baltimore.

“Social Security is a huge planning tool for many, [but] when dealing with a HNW individual, Social Security may cover only a very small percentage of needs,” said Tami Noll Russo, CPA/CFP and PICPA member with Noll Financial Services in Middletown, Pa. “With interest rates still at historic lows, insurance products such as single-premium, immediate annuities and guaranteed income riders on investment accounts are becoming increasingly valuable with our highly volatile stock market.”

“One of the biggest issues seniors have to plan for is the best withdrawal strategy for their required minimum distributions,” Russo added. “Tax deferral is not always the best when it comes to IRA and retirement accounts. Tax diversification between traditional and Roth 401k options during earning years can be highly beneficial during retirement. In addition, getting into the practice of always filling up the lower-income tax brackets regardless of age can help mitigate a huge tax bill when required minimum distributions start.”

Taxpayers 70-1/2 and older and subject to RMDs do have the option of making qualified charitable distributions directly from their retirement plan. The maximum that can go to a charitable organization through the QCD is $100,000 per person per year. “This removes the charitable contribution amount from their income tax return calculations altogether, which can have far-reaching effects,” Blankenship said.

“It’s always going to be at least as beneficial, often more beneficial, from a tax perspective to preclude the distribution from income rather than get the deduction,” said M. Jean McDevitt CFP and principal with Baker Newman Noyes in Portland, Maine, where she leads the private client services group and works primarily with HNW individuals and family groups. “The QCD may produce significant income tax savings at the state level, as well.”

Some breaks benefit retirees not because of their age but because of the decisions they might make at that time of life. For instance, “the ability to exclude a significant amount of capital gain on the sale of one’s principal residence is a tax break that, while available to any U.S. taxpayer, tends to apply more often in retirement years,” McDevitt said.

The federal gain exclusion applies if your HNW client owned and used the residence as a principal home for at least two of the five years before the sale; a taxpayer may exclude up to $250,000 of gain ($500,000 if married and filing a joint tax return).

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