Generational Tax Tips

The Money Issue

The start of a new year and the preparing of a new tax return is also a good time to make sure one is making the best tax decisions possible. It can be especially important to assess decisions based on one’s age or stage in life, because there can be some very different consequences to making bad choices.

For instance, the two largest generations – the Baby Boomers and the Millennials – tend to be in circumstances that are dissimilar, meaning they should be considering some different strategies for maximizing savings on their taxes.

There are a number of tax benefits available to Baby Boomers, the oldest of whom are retirement age.

Those who have already turned 65 qualify for a higher standard income tax deduction than their younger counterparts, notes Jeanette Gribbin, tax manager in WeiserMazars LLP’s Edison office. In 2017, the standard deduction for single (and married couples filing separately) taxpayers over 65 will be $7,900, $1,550 higher than for those under 65. Married couples filing jointly get a standard deduction of $12,700, plus an additional $1,250 per spouse over the age of 65, for a maximum deduction of $15,200.

“Workers age 50 and older can also contribute an additional $1,000 to a traditional or Roth IRA, or a total of $6,500 in 2017. The tax savings is even bigger for workers over 50 with access to a 401(k) plan,” Gribbin says. “In 2017, the catch-up contribution amount is $6,000, for a total tax deferred contribution of $24,000.”

Making the maximum contribution one can afford to a retirement account is always a good idea, as it both helps bolster the amount available in retirement and, for traditional IRAs and 401(k)s, it allows a person to pay less in taxes while working and likely in a higher tax bracket than he will be in retirement. Although contributions to a Roth IRA are taxed, withdrawals are tax free.

Boomers age 59½ and older can also begin to make withdrawals from their IRAs without paying a 10 percent penalty. Those 55 and older can take money from a 401(k) penalty-free after leaving a job, as long as the withdrawals are from the account associated with the job most recently left.

“However, keep in mind that income tax will be due on withdrawals from traditional accounts,” she warns.

Taking money out of a 401(k) account is one of the biggest tax mistakes a Millennial can make, according to Gribbin. They will have to pay taxes on a withdrawal and usually also pay a 10 percent penalty.

She adds that the oldest Boomers need to be aware that those age 70 ½ and older are required to take annual minimum distributions from their IRA accounts or face a penalty. This withdrawal is taxable, although there is a way around that.

“However, if you do not need the money and don’t want to pay the tax on the distribution … you can avoid income tax on the withdrawal by transferring any amount up to $100,000 directly from the IRA to a qualified charity,” she says. “By doing this, you would not include the withdrawal in your taxable income for the year.”

A problem many Millennials face is an inability to fully fund a 401(k) or IRA. They are giving up their maximum tax break and what will likely be much needed retirement income. And if it is a plan with an employer match, they are losing out on free money by not making the maximum contribution.

“They should fund a 401(k) if they can afford to do it, but many Millennials can’t afford it,” says Barry Horowitz, team leader of WithumSmith+Brown’s tax services state and local tax group. They don’t make a lot and have other financial obligations, particularly high student loan debt. However, “if you have a company match, you’re stupid not to,” Horowitz says.

Millennials’ generally shaky financial status means they also miss two popular tax deductions related to home ownership – the mortgage and property tax deductions. Well used by Baby Boomers, these are the largest deductions some filers can take. Millennials, often paying high rent and paying off large student loans, may not be able to afford the typical 20 percent down payment needed for the best interest rates, and so many are not buying homes, Gribbin says. Boomers and any home owner should make sure to take all home-related deductions. These also include points paid on the purchase of a home the year it is bought and interest on home equity loans. Another bonus: Part or all of the gain from the sale of a home can be excluded from taxable income after the owners have lived in it for two years.

Another mistake some Millennials make that can cost them dearly is not getting health insurance.

“Health insurance costs are at an all-time high, and some people simply can’t afford it,” Gribbin says. “Millennials often offset high rent costs and student loans by electing out of health insurance, thinking they’re young and healthy and don’t need it.”

However, those who do not purchase health insurance through an employer or in the marketplace, and who don’t qualify for a health coverage exemption, have to pay a penalty, called the individual shared responsibility payment. Depending on an individual’s circumstances, this fee could be substantial.

Horowitz cautions that there is very little solid advice to give any group beyond the 2016 tax year because it is unclear what the new president will do.

“Pretty much everything is going to change,” Horowitz predicts. “We believe tax rates will go down. … If you are a high income individual, accelerate your deductions into this year.”

That advice probably applies more to Boomers, who are more likely to be in high-paying jobs, but would also be prudent for Millennials with substantial income, because Trump has pledged to simplify the tax code and eliminate most deductions.

Horowitz also says the loss of the deduction for charitable donations is unlikely, so those with higher incomes looking to try to reduce their taxes and can afford to give, might want to use as much in charitable deductions as possible this year.

Here are some other quick tax tips that apply in 2016, but may, or may not, change if Congress approves some kind of tax reform.

For Boomers:

  • Social Security retirement benefits are sometimes taxable, so determine if that is the case. File a W-4V form to request that taxes be taken out of the disbursement so that you are paying enough in taxes and will not owe an underpayment penalty.
  • Consult a tax professional before selling an investment to generate income to evaluate the impact of a potential 3.8 percent Medicare surtax, known as the net investment income tax, if your modified adjusted gross income is over the threshold – $250,000 for a married couple filing jointly.
  • For those who are self-employed or have a small business, it is not prudent to take a loss for more than three of the prior five years. Such a loss cannot be used to offset other income.

For Millennials:

  • Take all the credits you can. One credit often missed is the Savers Credit, a tax credit of up to $1,000 that those making $45,000 or less can get for contributing to a 401(k) or IRA. There are also two education-related credits: the Lifetime Learning Credit of up to $2,000 for those paying for a post-high school classes or degree, and the American Opportunity Tax Credit of up to $2,500 for undergraduates in their first four years.
  • Deduct all the expenses you can. Some deductions many Millennials may have, but not use, include the deductions for student loan interest (up to $2,500), job hunting expenses (travel, printing and employment agency fees), and moving (if you moved more than 50 miles in the past year).
  • Plan for self-employment taxes. Those working in the so-called sharing economy or as contractors in temporary jobs who are not employees and are not having income taxes deducted from a paycheck need to make estimated tax payments four times a year to avoid owing a penalty for underpayment of their taxes. They should also look for as many deductions as possible to lower their tax liability and keep good records to support those deductions.

Good advice from tax experts for people of all ages is to do a financial review every so often, and particularly during times of life changes – for instance, when one gets a raise at work, loses a job, gets married or divorced, has a baby or has a child graduate from college.

“So many things can happen in a year, and we need to be cognizant of how those changes affect us financially, and how they impact our tax obligations,” Gribbin says.


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