Tax Opportunities for Comfortable Retirement

There are several ways to take advantage of loopholes in the tax laws to enhance your retirement. Here are the most effective strategies to consider.

Sell your home tax-free.

The tax law does much more for home owners than simply letting them take a $250,000/$500,000 tax-free gain on sale. Here are additional ways the law helps some owners save taxes…

  • A home qualifies as a principal residence, on which you can take tax-free gain, if you’ve lived in and owned it for only two out of the previous five years. So, if you moved out of your home up to three years previously, and perhaps have rented it out for profit in the meantime, it will still qualify as a residence on which you can take tax-free gain.
  • You can take tax-free gain multiple times. The law allows you to use the $250,000/$500,000 exclusion once every two years.
  • Transfers of homes to children made easier. Some parents who approach retirement age desire to make a gift of the family residence to their grown children. The drawback to this was that when a home had appreciated in value, for income tax purposes it was better for children to receive it by inheritance than by gift. Current tax law eliminates this problem for many by enabling a child who receives a home by gift to use the $250,000/$500,000 exclusion to eliminate the gains tax that otherwise would be due, provided the child uses the home as his/her principal residence for at least two years.

Sell your home to your children and rent it back from them.

Here’s a way that both you and your children can get benefits from Uncle Sam. You benefit because you get retirement money from the sale of your home. You can also pay less rent because your children can charge you a “fair rent”, which one Tax Court has ruled can be lower than “fair market rent” since renting to relatives entails less risk than renting to strangers. Your children benefit because they can deduct mortgage interest, taxes, and depreciation… deductions that mean greater tax savings to your high-tax-bracket children than they mean to you as a lower-tax-bracket retiree.

Control your retirement plan distribution.

The law requires that you begin to withdraw money from your IRA by April 1 following the year in which you become 70 1⁄2. By using actuarial tables, you may be able to take out less money during the early years to avoid increasing your income to a higher tax bracket. Your IRA trustee can tell you whether you can slow down your retirement plan distribution withdrawals.

Municipal bond interest.

This is generally tax exempt from federal income tax – and may be exempt from state and local income tax as well. Caution: Certain municipal bonds, known as “private activity bonds” (because they finance nongovernmental functions, such as construction of sports stadiums), pay interest that is taxable under the alternative minimum tax (AMT).

Use life insurance to pay your estate taxes.

Look into establishing a trust to purchase life insurance, the proceeds from which would pay your estate taxes.  If you’re in your early sixties or younger, life insurance premiums may be a low-cost way to pay estate taxes.

Protect your assets against nursing home costs.

The government won’t pay your nursing home costs until all money in your name has been exhausted. But if your money is in a trust that pays income and doesn’t give you access to the principal, only the income will go to the nursing home and the principal will remain intact. Be sure to consult an attorney about the laws in your state, because many states will not honor such a trust if it is set up within five years of the time you enter a nursing home.

A wise way to use a power of attorney.

Protect yourself against the possibility that you might become incapacitated and be unable to manage your money. By giving power of attorney over a special bank account to someone you trust, you can be sure that money will be available to take care of you.