As the year ends, it’s time for retirees to take advantage of tax-saving opportunities. Proper year-end planning can significantly impact your financial health and give you financial peace of mind heading into the new year. This edition will focus on three key strategies to optimize your tax situation: Roth conversions, Qualified Charitable Distributions (QCDs), and Arizona-specific tax credits. Let’s dive in!
Roth Conversions: Pay Now to Save Later
A Roth conversion is one of the most impactful tools in a retiree’s tax planning toolkit. Here’s why it’s worth considering:
What Is a Roth Conversion?
A Roth conversion involves transferring funds from a pre-tax retirement account (like an IRA) to a Roth IRA. You’ll pay taxes on the converted amount now, but future qualified withdrawals—including growth—will be tax-free. Keep in mind the 5-year rule: each conversion starts its own 5-year clock, during which withdrawals of the converted amount may be subject to taxes and penalties if you’re under age 59½ and don’t meet other qualifications. Understanding this rule is crucial for managing tax implications and timing withdrawals effectively.
Why It Makes Sense for Retirees
If you’re in a lower tax bracket this year than you expect in the future (due to required minimum distributions or rising tax rates), converting now at a lower rate can save money in the long run. For example, couples in the 12% bracket might benefit from converting up to the top of that bracket, locking in a favorable tax rate.
Timing Is Key
Remember, Roth conversions must be completed by December 31 to count for this tax year. Start early to ensure processing isn’t delayed.
Qualified Charitable Distributions (QCDs): A Tax-Efficient Way to Give
If you’re over 70½ and have a charitable heart, QCDs are an excellent way to reduce your taxable income while supporting causes you care about.
How It Works
With a QCD, you direct funds from your IRA to a qualified charity. The distribution is excluded from your taxable income, which can keep you in a lower tax bracket and potentially reduce your Medicare premiums.
Why It’s Beneficial
Unlike cash donations, which may not provide a tax benefit if you take the standard deduction, QCDs offer a direct reduction in your tax liability. For example, a retiree in the 12% tax bracket giving $8,000 via QCD saves $960 in taxes compared to donating from a checking account.
Pro Tip
Ensure the funds are sent directly from your IRA custodian to the charity. If the funds go through your account first, they become taxable.
Arizona State Tax Credits: Targeted Giving with a Twist
State-specific tax credits allow Arizona retirees to manage their tax bills while supporting local organizations.
How It Works
By contributing to qualified organizations, such as private school tuition organizations or charitable groups, you can receive a dollar-for-dollar credit against your Arizona state tax liability.
Key Limits
For 2024, married couples filing jointly can claim up to $5,421 in credits across all categories, while singles can claim $2,716. Note that credits cannot exceed your total Arizona state tax liability.
Example in Action
If your total state tax liability is $1,127 and you donate that amount to an eligible charity, you eliminate your tax bill. Plus, you may receive a refund if you’ve already paid state taxes through withholdings.
Resources to Explore
Visit AZTaxCreditFunds.com for a list of qualifying organizations and their missions.
Final Thoughts: Act Today
The window for implementing year-end tax strategies is closing fast. Whether considering a Roth conversion, a QCD, or an Arizona tax credit, acting early ensures you don’t miss out on these opportunities. To download our AZ Tax worksheet you can use this link.
Need help navigating these decisions? Contact us to schedule a personalized tax planning session. Let’s ensure you’re positioned for financial success in the new year!
Here’s to a stress-free and financially optimized 2025!
