There Are Many Ways to Lower Your Tax Bill in Retirement. 5 Strategies to Keep in Mind.

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While you are working, paying high taxes is often unavoidable.

Not so in retirement. There are numerous strategies to trim your tax bill, and the new tax law passed earlier this year made it easier for millions of seniors to use them.

For starters, the law made permanent the temporary lower tax rates and expanded the standard deduction from the 2017 tax law. Then it added a $6,000 deduction for people ages 65 and older, which begins phasing out for singles when they hit $75,000 in modified adjusted gross income and for married couples when they hit $150,000.

Add the various senior deductions to the standard deduction, and a retired married couple can have $46,700 in taxable income in the 2025 tax year before they pay a dime in federal taxes. Even if that couple collects $100,000 a year together in Social Security benefits, and takes another $50,000 in 401(k) withdrawals, they will pay just $6,351 in federal taxes, calculates Sean Mullaney, a certified public accountant and co-author of Tax Planning to and Through Early Retirement.

“People worry about taxes in retirement,” Mullaney says. But he adds that retirees, even those who haven’t optimized their finances for tax efficiency, “tend to be lightly taxed.”

You can trim your tax bill further by keeping a few simple principles in mind in retirement.

Take Advantage of Low-Tax Years

Let’s say you retire at age 65, live largely off your after-tax savings, and plan to wait until age 70 to collect Social Security to maximize your check.

You are in a golden period where you will pay little or no income taxes. The temptation, of course, is to enjoy those years without taxes. The smarter move is to fill up your low tax brackets to cut your taxes later in retirement, or taking the maximum amount of income that keeps you in the lowest possible tax bracket.

How aggressive you are depends on how wealthy you are. If you are a middle-income earner and don’t expect to be in a high bracket later in retirement, you should fill out only the lower tax brackets—perhaps up to 12%. You can do this by withdrawing money from your individual retirement accounts even though you are years away from required minimum distributions, or RMDs.

You might consider small Roth conversions. In this maneuver, you transfer money from a tax-deferred account to a tax-free Roth. You’ll owe taxes on the money transferred, and Roths don’t generally make sense unless you have enough cash in a brokerage account or bank account to cover the payment. In addition, you don’t want to do large Roth conversions that push you into a higher tax bracket, or make your income too high to qualify for the $6,000 senior deduction.

When Big Roth Conversions Make Sense

Wealthier people with multimillion-dollar IRAs or 401(k) accounts should take more-aggressive actions and worry less about endangering the $6,000 senior deduction. If they do nothing during their late 60s or even early 70s, they will eventually have huge required minimum distributions from tax-deferred accounts later in retirement, pushing them into higher brackets for taxes and Medicare premiums.

The fix is to start whittling down your tax-deferred accounts by doing Roth conversions before your RMDs start. A single person using the standard deduction can have up to $121,100 in taxable income and stay in the 22% bracket for a Roth conversion.

Five years of Roth conversions at this level would move more than $600,000 out of your tax-deferred accounts. It’s a smart move for seniors who expect to have a significant amount of RMDs subject to the 24% tax bracket or higher, Mullaney says.

Minimize Social Security Taxes

If you are a high earner and have hefty retirement income from investments or pensions, you will almost surely be taxed on 85% of your Social Security benefit, the maximum possible.

By contrast, if you’re middle class, your tax bill may hinge heavily on how much of your Social Security benefit is taxed.

Social Security uses a confusing formula to determine how much of your benefit will be taxed. It takes your adjusted gross income and adds half your Social Security benefit plus municipal bond interest. The bottom line is that if almost all your income comes from Social Security, you will pay little or no federal income tax.

If you have the usual mix of tax-deferred retirement accounts and a brokerage account, some of your Social Security benefits will be taxed. Still, there are steps you can take to reduce the hit.

Start by lowering your RMDs by doing Roth conversions before you start collecting Social Security. If you have a lot of money in brokerage accounts or bank accounts, look for tax-efficient ways to invest it. Investments that throw off a lot of income—like bank certificates of deposit or money-market accounts or real estate investment trusts—aren’t tax-efficient.

Most stocks are more tax-efficient. The dividends they pay will likely be taxed at a lower rate. If you sell stocks held at least a year, you will pay no capital-gains tax if your taxable income doesn’t exceed $47,025 for singles and $94,050 for married couples, and usually only 15% if it exceeds those income limits. Truly big gains are taxed at 20%.

Itemizing Has Become More Attractive

The new tax law permits up to $40,000 in annual federal tax deductions for property taxes and state and local income taxes. David Frisch, a CPA and financial advisor in Melville, N.Y., says many more of his clients on Long Island—notorious for its high property taxes—will be itemizing this year as a result.

He is telling them to keep close tabs on medical expenses, which can be itemized if they are in excess of 7.5% of adjusted gross income. This includes mileage driving to doctors, Medicare premiums, supplemental Medicare insurance premiums, and dental expenses.

Be Strategic About Charitable Gifts

Instead of making big donations every year to your favorite charity, consider bunching them, says Ann Reilley, a CPA and financial advisor in Charlotte, N.C. In the years when you do heavy giving, itemize when you file taxes.

In other years, take the standard deduction. This is a more efficient strategy. “You don’t want the tax tail to wag the dog, but if [clients) are already charitable inclined, you want to use the best strategy,” Reilley says.

If you have a large tax-deferred IRA and are at least 70½ years old, there is an even better way of giving: the qualified charitable distribution. These donations count toward your RMD and don’t appear on your tax return at all. Suppose you must take a $40,000 RMD, which will be taxed. If you instead write a $40,000 check to a charity from your IRA, you won’t get taxed.

You can’t make qualified charitable distributions from a 401(k); you must transfer the money first to an IRA. “You almost want to get a checkbook for your IRA—just for charitable purposes,” Frisch says.

Write to Neal Templin at neal.templin@barrons.com