How Taxes Can Impact Your Retirement Goals
What do taxes and retirement have to do with one another? How is retirement income taxed in different states? And how can tax deductions impact your retirement goals? There are a few things that determine the amount of taxes you’ll pay during retirement, they include your filing status, the sources of your retirement income, and the total amount of income you receive each year.
Having a good sense of how taxes might impact your retirement can help you establish a more accurate vision of your future. Here are a few important things to consider about taxes and retirement when trying to build out a smart retirement plan.
There are a few sources of income that will determine whether or not you’ll have to pay taxes on your Social Security benefits, and how much you’ll owe. These include wages, salaries, tips, IRA and 401k distributions, interest on investments, pensions, and annuities. Together, these items make up your annual gross income (AGI).
If you don’t plan to work after retirement, you won’t have to worry about calculating your wages. You can continue to work if you’d like, but you’ll have to make under a certain amount to prevent your Social Security benefits from being withheld. And even if your benefits are not withheld, working is likely to impact the taxes on your retirement.
If your AGI is below $24,999 none of your social security income will be taxed. If you make between $25,000 to $34,000, up to 50 percent of your social security income might be taxable. If you make anything over $34,000 up to 85 percent of your social security income is likely to be taxed. These amounts apply to people who are filing individually. If you are married and file a joint return, 85 percent of your income may be taxed if you make over $44,000.
If social security is not your only income, then you will also still have to pay taxes on your other sources of income at a federal level. These income sources are taxed at the same rate, regardless of whether or not you are a retiree. The only exception to this might be a Roth IRA since it is funded with money that has already been taxed.
You may also have to pay state taxes on your retirement income, depending on which state you live in. For this reason, it’s worth considering states that are good for retirement. Some states charge no tax at all on retirement income, while others may follow federal taxing guidelines or establish their own.
Moving to a new state purely for tax-saving purposes may not be the most effective plan. But if there are other advantages to motivate your move—like downsizing your space, exploring over 55 communities, or moving closer to family—you could stand to save a decent amount of money. Just be wary of states that have no retirement taxes, but high property or sales tax.
These tax deductions in retirement could help you achieve your retirement goals.
There are a few key things to know when calculating tax deductions during retirement. The easiest one to note is that the standard tax deduction for retirees over 65 is higher than it is for those who are younger. That means that you’ll automatically receive some benefit as long as you are taking the standard deduction.
While the benefit above is a great incentive to go with a standard deduction over an itemized deduction, you may want to skip it if you paid large medical bills during the year that were not reimbursed. If your total medical expenses exceed more than 7.5 percent of your income, you can deduct your medical expenses on your tax return instead.
You may also be able to contribute more money to your retirement accounts after the age of 50. This amount ranges between $1,000 and up to $7,500 more than the standard amount you’re allowed to contribute each year to a 401k and IRA. By making these contributions before or during your retirement, you could reduce your overall AGI and therefore pay less tax overall.
While this tax deduction is available to everyone, it’s a good incentive for downsizing your home before retirement or considering over 55 communities instead. The IRS allows single individuals to exclude from your income up to $250,000 of capital gains on the sale of your house. That number rises to $500,000 if you’re married.
Learning how taxes impact retirement can help you establish more accurate retirement goals and help you reduce the amount of retirement taxes you have to pay every year. This type of retirement planning is essential for anyone looking to live out their golden years in peace.
Contributed to The 55+ Society by Brittney Villalva
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