New $6,000 Senior Tax Break: What Retirees Need to Know

Video Chapters & Transcript:

Howdy folks. Welcome to yet another edition of Smarter Money Matters. It really, really matters. You want to be smart about your money. And we have another very exciting episode on taxes. A new new $6,000 senior tax break that most retirees are missing out on. Uh, so we’re talking about a tax break that millions of retirees could qualify for, but many people don’t even know it exists. And I bet a lot of their tax preparers don’t know either. So, you want to kick it off there, Yes, I I’ll kick it off. Um, so, and I’ve actually had some questions from clients about this because when Trump was running um in the last election, he mentioned a big policy proposal was no tax on social security. Well, that has not materialized. um a kind of substitute that that is going to happen that happened through the one big beautiful bill at least for the next couple years is this $6,000 senior tax credit or tax break. Um so basically this this uh it’s not an automatic benefit. Um the benefit does depend on your income level and how you will manage your withdrawals and deductions. Okay. And uh pray tell would you like to tell us more about that Kimberly? I’m intrigued. No, I I mean actually that’s going to come down to right throughout the year if it’s going to depend on contributions and how you’re doing withdrawals and things like that. Obviously doing a little planning along the way and making smart choices is going to yield the best results. Yeah. And like we talked about in a previous podcast, you don’t want to mess with the numbers you really have no control over like information returns, W2s, K1s, and so forth. Your deductions are a much more creative space to do some some tax benefit cooking in. Uh, and this is really where we’re going. So, let’s start with the basics. Uh, now, what exactly is this new tax break, Kimberly? Well, it’s going to be for seniors aged 65 and older, and it’s worth uh up to $6,000. So, it does apply to tax years 2025 through 2028, uh, and was introduced as a compromise after proposals to eliminate the tax on social security didn’t pass, as Anna didn’t mention, right? So, what’s interesting about this? Yeah. So, what’s interesting about this deduction is it’s available whether you itemize or take the standard deduction. Very cool. That’s great. Yeah. Which is good because most of our clients that I talk to take the standard deduction. Yeah. But you don’t have to. So, it gives you wherever that’s going to give you the biggest bang for the buck. So, so the so retirees can claim it on top of normal deductions available to seniors. As Anna said, most of our clients file the standard deduction since it’s so big these days, right? And uh seniors already get the extra deduction. That’s 2,000 for singles or 3,200 for married couples on top of the standard. And now an additional 6,000 on top of that. Ch-ching. So that’s a stack I can get behind. I tell you what. Right. So, not everybody qualifies. Is that right, Adam? Yes. Because the deduction does have income limits. it starts to phase out um, at once income exceeds 75,000 for individuals and 150,000 for married couples, right? This still gives you a lot of dancing room for many retirees depending on the RMDs and they may not kick in until later on. So, and that’s one thing you want to have your tax strategist finesse is how do I keep my otherwise taxable income is it AGI probably, you know, below 150. And you do have some levers in your toolbox like how much you take out of your eye, Roth conversions, business, you know, rental income losses, that kind of stuff. Um, but after that, where does it completely disappear Kimberly? Uh, it completely disappears at 175,000 for singles and then 250 for married couples. So sometimes just that narrow little gap, right? Reclassifying or figuring out how to drop that AGI just by a little bit. It’s the difference between getting something and getting nothing or even staggering year to year depending on income situation. let’s drop it down this year. We’ll grab the deduction. Next year we’ll make a bunch more income and we’ll get it anyway. And as you know, kind of walk the line to maximize the tax benefits, which is really the essence of tax strategic planning, you know, which is so important. And most tax preparers and CPAs, whatever, know tax preparers, they they’re basically historians. You give me the shoe box, and I plug the numbers into the software and here’s what you owe. You better pay it. There’s no planning that goes on in order to to get the numbers that you enter on your return that that actually serve you and drive significant tax savings, which is kind of what we’re talking about. So again, looks like the tax break really is targeted toward middle inome retirees. Would you say that’s true, Anna? Yeah, exactly. Middle income. Um, and again, like like Jeff said, it’s important for tax planning purposes to try and be able to take some or all of this deduction if you can. Yeah. So, well, let’s talk strategy. Why does managing your income matter so much here, which is really the drum we’ve been beating already earlier in the episode? You want to begin, Kimberly? Well, I think it’s it’s what you alluded to earlier. This is your the adjusted gross income number, right? So, there’s a lot of ways that you can, you know, get that to be the number you want. Yes. So, if your income is slightly above the threshold, you might suddenly lose the deduction entirely. So, you want to sharpen that pencil strategically before the year is over. in many cases and you lose a lot of options to make sure you’re targeting the income results you want. So, this is where retirees actually have an advantage over workers. Is that right, Kim? Uh, yes. Retirees often have multiple income sources. IAS, Roth brokerage, social security, and the flexibility allows you to manage taxable income. All right. So, let’s go. Let’s Kimberly go through a few strategies that retirees can use. We’ll start with you. What’s one approach? Uh, using Roth IRA withdrawals, right? Those withdrawals don’t count toward your adjusted gross income, which means they won’t push you above that income threshold. And what else, Anna? Yeah. So, a lot, you know, if you’re retired and you work part-time, have a side hustle, which is extremely common, trying to reduce that earned income as much as possible. And that’s key word you say and even small adjustments could keep your income under the phase out level and give you the maximum deduction. But, you know, earned income is a special quantity a lot of people may not appreciate. Earned income means money that you work for. Typically, it’s W2 wage income. Typically, uh could be self-employment income on a schedule C. Unearned income are things like dividends or interest or, you know, or your K1 distribution from an escorp that you own, but not your W2 from uh the uh from the ESCORP. So, paying attention to the to the terms and understanding a tax strategy is really really important. And if it is in fact earned income, that’s a trigger. You can have a whole stack like RMD income is not earned income, right? But you know, working here, your W2 as you slave away in a job that you passionately have loved for decades now is earned income. So we should try to minimize that though. So we qualify for that deduction because I know I’m old enough to qualify for it. Right. So um so so what are some other things like there are like also charitable strategies, Kimberly? Sure. Right. So, for those of you that are charitably inclined, maybe you’ve got some appreciated stock, right? You don’t want to go ahead and sell the stock and realize those gains because that’s going to trigger tax. So, just take the appreciated stock and donate the shares. That way, you avoid the unnecessary taxable income. That that would be uh um that so that so so again, what I infer from that is that the rule is not earned income. It’s probably adjusted gross income, which includes all of them. So, forget what I said about earned income at least in this context. Uh but that’s one way to reduce it. There are other ways to reduce your other income. Um so instead of selling stock and realizing the capital gains, you donate the shares. You get a tax deduction. Um not if you unless you itemize though, but you also avoid the capital gains tax. So in the best case scenario, you get a deduction for the full. Say I paid a, you know, $100,000 of stock. It’s worth a million dollars. Now I give it to charity. I get a million dollar deduction plus I don’t have to pay the capital gain of a million minus $100,000 $900,000. Pretty powerful strategy. if you’re professionally if you’re charitably in inclined. So if you what about if you itemize deductions? Yeah. So if you itemize deductions, these charitable giving um like we were talking about can also reduce your taxable income further. Right. And another strategy that uh that applies is uh involves retirement contributions, doesn’t it, Kimberly? Sure. Just your standard old traditional IRA in 2025 if you’re 50 or older. That’s $8,000 is the uh the contribution limit now, which of course, depending upon your situation, is also deductible. So, I guess that deduction could also help maybe lower income people. Yeah, it could help. It could help people if you have some earned income, you’re working part-time and you’re within the range, make the make the contribution and lower your income. So, here’s a big takeaway, right? You know, the new deduction is a really meaningful opportunity uh in the in the right background, but it’s also a planning opportunity. You want to start to finish there? Yeah. So, if your income is close to the threshold, right, if you’re starting this year, 2026, your income is close to the threshold or any year moving forward, think about what are some small adjustments that you can make to again bring yourself below the threshold, right, to unlock potentially thousands of dollars of tax savings. And just to, you know, put put this in context, if you get a $5,000 deduction and you’re in a 40% bracket, just making the numbers up. I have to see where the brackets fall with this, but you know, simple math. That’s $2,000 in your pocket, right? You can have a nice dinner. True. Yeah. What else can invite me to that dinner? I’m not sure that two 10,000 will cover more than one person, but um and what about more proactive tax planning? Uh it becomes even more important just like you touched on when you’re in retirement and your sources of income change or become multiple sources, right? It’s not just one thing. Oh, I’m working a job. In retirement, that can turn into a lot of things. Maybe it’s still earned income, maybe it’s, you know, off of investments. So, those multiple sources, there’s a lot of just a lot of opportunity, a lot of things to pay attention to. Well, that’s great. Ladies, thank you once again for joining us. Kim, it’s great to have you on the show. Hope you’ll come back. And as usual, Anna Wunderlich has done a wonderful job. And until next time, this is Dr. Jeff Camarda saying, “Smarter money matters.” It really does. Thank you so much for watching.