Retirement brings plenty of changes, and with those come changes to your tax situation. Here’s a rundown on the top five things you need to know when
it comes to paying taxes in retirement.
Remember to File
You’ve heard the old saying, “Nothing is certain except death and taxes,” haven’t you? Unfortunately, retirement often doesn’t change the truth of that. For most
folks, decreased income during retirement can lead to lower taxes, but don’t automatically assume that you’re through with filing. Potential sources of taxable
income during retirement include rental properties, IRA distributions, pensions and Social Security. If you have taxable income, make sure you, like the rest of
the nation, have filed your taxes by April 15.
Know What's Taxable
Being aware of your taxable income is an important first step to financial planning in retirement. Online Trading Academy’s Michael Atias says, “Many seniors are
surprised to find out that up to 85 percent of their Social Security is taxable.” Whether your benefits are taxable and at what rate depends on your overall annual
income. Form SSA-1099 includes a worksheet that can be used to calculate this.
Traditional IRA distributions are another common source of taxable income in retirement. Not only that, but people age 70½ and older must take required minimum
distributions from their IRAs or face stiff penalties. However, if you have a Roth IRA, the rules are different. The distributions aren’t subject to income tax,
and during your lifetime, there are not required minimum distributions.
Take Advantage of Credits and Deductions
The Elderly and Disabled Tax Credit is available for seniors 65 and older who fall under a certain income level. Additionally, a disability may qualify you for
this credit, even if you are younger than 65. This credit can reduce your tax liability.
In retirement, you may find that itemizing deductions is no longer your best course of action. If you go the standard deduction route, you’ll be glad to learn
that the amount is higher if you or your spouse is 65 or older.
Give Money Away
If you have money to spare, giving some away offers several tax advantages. One way to give your money is in the form of gifts, and gifts up to a certain amount
are non-taxable under the annual gift tax exclusion. In 2013, the annual gift tax exclusion was $14,000.
Charitable giving has also been beneficial for those taking advantage of Qualified Charitable Distributions. With QCDs, you could avoid paying taxes on all or
part of your required minimum distribution from your IRA by having it sent directly to a qualified charity. These expired at the end of 2013, but many people
are hopeful they’ll be reinstated in 2014.
Dave Du Val of TaxAudit.com explains that these avenues “may allow you (legally) to lower your adjusted gross income, which affects the taxability of many other
sources of income, such as Social Security and rental income.”
Don’t wait until April 14 to think about taxes. Having a plan for your money can save you significantly at tax time, but it requires forward thinking and considering
how you’ll handle your money over the coming years. Atias advises, “If you plan right, you can pay a very low tax rate on income when retired.”
A financial advisor can help you establish a plan and stay on track with it. He or she can also advise you on how these various retirement-specific tax
situations apply to you. You may not be able to leave taxes entirely behind in retirement, but with careful planning, you may find yourself paying much less
than you have in many years.