Income tax retirement
Are you retired and worried about income taxes? Are you wondering if there are any tax breaks that can help reduce the amount you owe? This article will outline some of the most common tax breaks for retirees, as well as a few tips on how to make the most of them. So whether you’re just starting to plan for retirement or are already enjoying your golden years, read on for helpful information!
Taxes on retirement: How all 50 states tax retirees?
State Income taxes, other taxes can quickly accumulate too, such as property taxes. For many individuals, this could cost thousands especially if they have a high taxable income. While the majority of us focus more on income taxes, other taxes can quickly accumulate too, such as property taxes before you file. Consequently, it’s important to research how all 50 states tax retirees before making a decision. Ignoring the local or state taxation might not be the best solution. Moving to a different place might be an ideal solution for some people. It’s a question most retirees ask themselves. Tax rates differ between different locations in some areas – for many individuals this could cost thousands. Therefore, it’s crucial to investigate the matter before making a final decision.
Do you know how your state income taxes retirees?
It’s a question that many of us overlook, but it’s important to consider when making decisions about retirement. After all, moving to a different state can have a big impact on your tax burden. And in some cases, retirees are taxed differently than other residents.
So how do the states stack up when it comes to taxes on retirement?
Here’s a quick rundown:
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming all have no state income tax. This can be a big advantage for senior retirees who are living on a fixed income.
A number of states offer special tax breaks for retirees. For example, Colorado exempts the first $20,000 of pension and IRA income from taxes, and Mississippi exempts all retirement income from taxes.
On the other hand, some states have high tax rates on retirement income. Nebraska taxes pension and IRA income at a rate of 6.84%, and Tennessee taxes dividend and interest income at a rate of 5%. So if you’re retired and living in one of these states, you’ll want to take care to minimize your taxable income.
Property Tax Rate
Moving to a different place might be an ideal solution for those with super high taxable income. In some cases senior retirees ignore the local or state income taxation. Your tax burdens can differ widely between different states. Tax rates differ between different locations in some areas – for many individuals this could cost thousands. While the majority of us focus more on income taxes, other taxes can quickly accumulate too, such as property taxes.
Of course, it’s not just income taxes that you need to worry about in retirement. Property taxes can also take a big bite out of your budget. Louisiana has the highest effective property tax rate in the country at 1.33%, while Hawaii has the lowest at 0.27%. So if you’re thinking about retiring to Louisiana, you’ll want to factor in the higher property taxes when budgeting for your retirement and before you file.
As you can see, there’s a lot to consider when it comes to state income taxes and retirement. But by doing your research and carefully planning ahead, you can make sure that you’re prepared for whatever the future holds.
What is the definition of Income Tax?
Income tax is a type of tax that the government (IRS) imposes on income generated by businesses and individuals. It is the responsibility of taxpayers to file an income tax return every year in order to determine their tax obligations. The taxes that are paid go towards funding public services, paying government obligations, and providing goods for citizens. Some investments, such as housing authority bonds, are typically exempt from income taxes. Overall, income taxes play an important role in keeping the government functioning and providing for its citizens as they file their taxes each year.
Taxable Income
Income tax is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. Income tax is used to fund public services, pay IRS obligations, and provide goods for citizens. Personal income tax is a type of income tax that is levied on an individual’s wages, salaries, and other types of income. Business income taxes apply to corporations, partnerships, small businesses, and people who are self-employed. Income taxes are progressive, meaning that the more income you earn, the higher your tax rate will be. The income tax system in the United States is complex, but the purpose of this taxation system is to collect revenue from people and businesses to fund government operations.
How Are Your Social Security Benefits Slapped?
The tax rate on Social Security benefits depends on the total amount of you income both you and your spouse receive. If you file joint tax returns, you will pay taxes on up to 85% of your benefits. However, if you and your spouse file separate tax returns, you will each pay taxes on up to 50% of your benefits. In either case, the tax rate will be based on your marginal tax rate, which is the tax rate you would pay on your last dollar of income. For most senior retirees, the tax rate on their Social Security benefits will fall somewhere between 10% and 15%.
HSA HIGH DEDUCTIBLE INSURANCE PLANS
In this article we are going to discuss how to pay less taxes during retirement. And the first method I want to review is the HSA insurance plan.
1) One of the first and most obvious things about health insurance is that most of us are not self-employed, we have a plan, we make payments to those premiums, and we do not get to take a deduction from any of our savings for medical emergencies. So if we have a plan and we are putting aside money for medical expenses, we do not get to deduct those savings at all. However, with a high deductible HSA medical savings plan, you are able to deduct the contributions to the HSA savings account before tax. This is a very powerful deduction, as there is no limit to your income where you can use an HSA account and deduct the amount that you put into savings, but it is also important to understand that you can deduct your HSA savings contributions regardless of whether or not you itemize. This is very important and makes it one of the most powerful deductions that exist today. When you make charitable contributions even to your favorite public charities, you still have to make enough contributions that go above your standard deduction in order to get a tax benefit or deduction from your income your AGI, which stands for Adjusted Gross Income.
However, with an HSA, there is no such requirement. Regardless of whether or not you are above or below the standard deduction, if you decide to itemize, meaning if you want to take your contributions to retirement plans and you want to take your donations to churches and HSA contributions, your mortgage interest and try to itemize it and beat the standard deduction, you may not be able to deduct some of these items. Eventually you will get to your taxable income. But with an HSA it does not matter. You still get to deduct it regardless of whether or not you are above the standard deduction when you itemize.
2) With an HSA your money is going to grow tax free. We will get to that in the last part. But as it grows, you are not going to have to report any types of gains, dividends, or interest on the account. You can generally invest the money with some range of flexibility depending on which HSA provider you use, but this is also another advantage to grow the money inside your HSA savings account tax-free.
3) Finally, the withdrawals are tax-free as well when used for qualified medical expenses. Normally when you contribute to say, a 401(k) or traditional IRA, when you pull the money out it is going to count as income and it is going to count towards your Social Security. That is not the case when you withdraw for qualified medical expenses from an HSA. So you can deduct HSA contributions like you would contributions to a traditional retirement plan and then you are able to withdraw money from your HSA account without paying taxes like you can with a Roth retirement plan.
In short,
as we look at HSA contributions from the day they came into the market, they still remain some of the most powerful contributions for tax benefits that are available to us.
They became even more tax beneficial with the Tax Reform in 2017 where people had to have itemized deductions above their standard deduction in order to be able to use them. It is beautiful to see that the HSA contribution is just not like that. You may deduct your HSA contribution no matter what. These are three of the most powerful tax benefits that we have today with an HSA.
KEEP INCOME LOW FOR SOCIAL SECURITY TAXATION CALCULATION
How to pay less taxes in retirement, after you are receiving Social Security, is to keep your income low enough to where you do not have to pay any taxes on the Social Security benefits that you receive.
Your Social Security Benefits can be in a situation where they are not taxed at all. The income that is used to calculate how much you will be taxed on your Social Security benefits is called combined income and is calculated by adding your adjusted gross income, plus your non-taxable interest, plus half of your Social Security benefits. That equals your combined income not your taxable income. You have to know what the thresholds are to determine how much of your Social Security benefits are taxed, and whether or not you can use certain strategies to avoid or reduce the taxes you pay on the Social Security benefits that you receive.
If you would like to discuss whether or not you can reduce the taxes that you pay on your Social Security benefit, click on the link here, and I will discuss it with you free of cost.
ROTH CONVERSIONS
So now, we will be looking at the benefits of making contributions or conversions to a Roth IRA. The advantages that someone in retirement can experience when making a conversion to a Roth IRA is amplified when fall into the lower federal income tax bracket.
1) The first advantage that we want to look at is when you are married, you have an extremely favorable tax federal bracket over single people and married couples that are filing separately. So, when you are making Roth conversions or even Roth contributions, but particularly the Roth conversions while you are married, you are locking in these lower rates that are afforded to married couples filing jointly. And this is a great idea because if one spouse dies, the income brackets are going to go down substantially with the same rates that apply to the married joint filing. The tax bracket is cut in half, roughly, when a spouse dies. So this allows you to get as much money as you can into a Roth and then if one of the spouses passes away and you have put as much money as you can into a Roth, it can pass on to the surviving spouse without any tax consequences.
2) Another advantage to look at with the Roth IRA is that these conversions reduce future required minimum distributions from traditional IRAs. The IRS only uses the amount of money that you have in traditional IRAs and 401(k)s and those type of pre-tax retirement plans to calculate your required minimum distribution. The IRS does not require you to use your Roth IRA in those calculations. You can withdraw money from it once you are retired and over the age of 59 and a half, because they are after tax and you do not pay any taxes whatsoever. That is another tax benefit of converting to a Roth IRA.
3) When you make withdrawals from a Roth they do not factor into the 3.8% Medicare surcharge or the Social Security benefit taxation. Many people in our country believe that we are moving towards socialism which will result in higher tax federal brackets for both single and joint filers. Whether you agree with socialism or disagree with it, that is not the point. The point is, when you are in retirement and you are withdrawing money from a Roth it is very advantageous to not have to count income towards your Social Security benefit calculation. And we are going to talk about that in another article or this article about Social Security taxation, your benefits being taxes. So as you can see, this is very important to further reduce your taxes by using these Roth withdrawals to not be used against you in calculating your Social Security benefit and whether or not it’s going to be calculated.
4) – There are no lifetime RMDs for the Roth per IRS guidelines. When you are moving money out of your traditional IRA into your Roth, you withdraw money from the Roth. You can let that money go to your spouse, you can let it go to your children. You do not have to withdraw money from a Roth IRA. There is no required minimum distributions like with the traditional IRAs or the other pre-tax retirement plans where those are going to start at 70 and a half or age 72 depending on what your situation is, keep that in mind as well.
5) The final benefit we will discuss today is the tax efficient investment opportunity that a Roth provides you. So now that you can convert money from a traditional IRA to your Roth it is going to grow tax deferred just like a traditional IRA. However, if you have capital gains in there and your stocks have increased or your securities have increased whatever you may have inside your Roth, you can sell it inside your Roth and withdraw that money and you will not have to pay any type of taxes on the gains from those investments.
These are five of the most important tax benefits that you will receive from doing a Roth conversion. We have an annual tax planning meeting with our clients where we discussed whether or not it would be beneficial for them to do a Roth conversion with their pre-tax retirement plans. And if you would like to set up a call to discuss this further and whether or not it is something that would be advantageous to you, please go ahead and click on the link to schedule a call with me.
BUNCHING CHARITABLE CONTRIBUTIONS IN YEARS
This a good way to decrease your taxable income or taxes in retirement if by bunching your charitable or service related contributions together in one year will go above the standard deduction.
With the 2017 tax reform we can no longer deduct charitable contributions unless they are above the standard deduction. If you are currently giving to charities or service groups and you are still using your standard deduction what you can do is calculate if you were to not give your charitable contributions in one year, and then the next year give your charitable contributions for the previous year and that year together and see if that would be more than your standard deduction. If the answer is yes, then it would be deductible for every dollar that pushes you above the standard.
In other words, you could make charitable/service deductions, you could give to your church or give to a ministry, Salvation Army, any service organization just about, or to whomever you would like. You could give $3,000-$5,000, and if your other standard deductions did not go above the standard deduction, then you would not be able to deduct that now, the way we stand. We can make charitable contributions now and not be able to deduct them unless all of our itemized deductions add up to be more than our standard deduction. And then you will have a lower taxable income, which is the goal after all.
One of the best ways to do this is to use the Donor Advised Funds.
TheDonor Advised Funds allow you to put charitable contributions into a fund you can disburse them as you like to different charities over time you would not have to make only one contribution, every two years to a charity.
Or every three years. You would be able to make the contribution if you wanted to, you could have it sent out monthly, annually, or another way that may fit what you are trying to do for the charity and what you discuss with them. This is a very common way to get a tax deduction that you may not usually be able to get simply by using a donor advised fund and bunching your charitable contributions together in one year and then in the year you are not contributing to charities at all, you will just use the standard deduction you have been using anyway with the charitable contributions regardless of whether you file as joint or not.
Taxes in Retirement
Updated for Tax Year 2022. One of the first things to consider when saving for retirement is the tax impact of your savings on your taxable income, retirement income, pension, and social security. Depending on the tax rate in your state and your federal bracket, you may be able to take advantage of tax-deferred growth on your investments. There are numerous options for saving for retirement. When you think about investing in your retirement fund, you might think about what you will pay in taxes on interest, dividends, gains, and more. It is essential to understand the tax impact on your retirement income, pension, and interest.
401(k)s and IRAs
For example, traditional 401(k)s and IRAs are able to create tax-deferred interest, which means you won’t pay any taxes on the money you contribute until you withdraw or have distributions in retirement. However, you will pay taxes on the withdrawals or distributions at your marginal tax rate. It’s important to consider your tax rate both now and in retirement when deciding which type of account is right for you.
The tax rate depends on three factors:
- the level of your Modified Adjusted Gross Income (MAGI),
- your tax filing status,
- and the type of investment account from which you are withdrawing the money.
If you have a low MAGI (retirement income) and are married filing jointly, for example, you’ll likely fall into the 10% tax federal bracket. But if you have a high MAGI, you may be subject to a 22% federal tax rate or even higher. Withdrawals/distributions from traditional 401(k)s and withdrawals from IRAs are taxed as ordinary income, while withdrawals from Roth accounts are tax-free. So, depending on your circumstances, it may make sense to invest more heavily in a Roth during your working years so that you can enjoy tax-free withdrawals/distributions in retirement. Ultimately, it’s important to work with a tax professional to understand how different types of accounts and their withdrawals or distributions will be taxed in retirement and to develop a plan that minimizes your tax liability.
6 Tax Tips for After You Retire
- If your MAGI retirement income (AGI plus tax exempt interest) is high enough ($182,000+ in 2022) to trigger an increase in Medicare Part B and D premiums. Consider strategies (e.g. QCDs, managing capital gains), to lower income to bring medicare surcharges down. Make Qualified Charitable Distributions (QCDs) from your IRA. This will allow you to reduce your income without having to pay income tax on the distribution. Another strategy is to carefully manage your capital gains. Capital gains, related to investment accounts, can be managed in a way that reduces your taxable income. Additionally, if you have income from sources other than wages or salaries, you may be able to exclude some of that income from your MAGI. For example, if you receive income from investments, you may be able to exclude up to $3,000 of that income. Talk to your financial advisor about strategies to lower your income and bring your medicare premiums down.
- An underpayment penalty may be charged if not enough retirement income tax is paid during the year. This can happen if you don’t have enough tax withheld from your paycheck or if you don’t make estimated tax payments. You might be able to avoid the underpayment penalty if you pay at least the “safe harbor” amount into your income tax account. The safe harbor amount is based on your previous year’s tax return. You can discuss penalty proofing with a tax professional to see if this is an option for you.
- Although you may not be able to contribute directly to a Roth IRA based on your Modified Adjusted Gross Income (MAGI), you may still be eligible to do so through the “Backdoor Roth” strategy. A “backdoor Roth IRA” is a type of conversion that allows people with high incomes to fund a Roth despite IRS income limits. Basically, you put money you’ve already paid taxes on in a traditional IRA, then convert your contributed funds into a Roth IRA and you’re done. The key advantage of this strategy is that it allows you to take advantage of a lower tax rate. If you expect your tax rate to increase in the future, the Backdoor Roth can be a great way to reduce your tax liability. However, there are a few things to keep in mind before using this strategy. You should be aware that the conversion will likely result in a taxable event if you have other funds in your Traditional IRA or other non-Roth retirement accounts. Finally, it is important to consult with a financial or tax advisor to ensure that this strategy makes sense for your unique situation.
- When it comes to rental property, there are a lot of things to keep track of – from repairs and maintenance to rent payments and tax filings. However, one thing that is often overlooked is home improvement expenses. If you plan to sell your rental property, it’s important to keep track of these expenses, as they can help to lower your tax bill to the IRS. The adjusted cost basis is the original cost of the property, plus the cost of any improvements made over the years. When you sell the property, the tax rate is applied to this adjusted figure, rather than the original purchase price. As a result, tracking your home improvement expenses can save you a significant amount of money come tax time. So be sure to keep good records – it could pay off in the long run!
- For many people, the tax rate on long-term capital gains is a significant factor in deciding when to sell investments. If your taxable income is low enough ($80,000 or less in 2022) to allow you to recognize long-term capital gains at a 0% tax rate, you may want to consider taking some or all of any unrealized capital gains. Of course, there are other factors to consider as well, such as the current market conditions and your personal financial goals. But if you’re looking to minimize your tax liability, selling investments with long-term capital gains when you’re in a 0% federal tax bracket can be a smart move.
- If you find yourself in a position where you are able to make cash contributions to charity, you may be able to take an additional tax deduction of up to $600 per the CARES Act. This is in addition to the standard deduction that you are able to take on your taxable income. To qualify, your contributions must be made to a qualifying charitable organization and you must itemize your deductions on your tax return. If you have any questions about whether or not your contribution will qualify, you should consult with a tax professional. Making charitable contributions is a great way to support the causes that are important to you and can also help you reduce your taxable income.
- For reported retirement income on Schedule C, E, and/or F, your risk of costly errors is elevated. Whether you’re a small business owner, a freelance contractor, or a landlord, if you’ve reported income on Schedule C, E, and/or F, then the tax rate on this type of income is generally higher than it is for other types of income. This means that even small mistakes on your tax return can end up costing you a lot of money. There are a few things you can do to minimize the damage. First, take a close look at your tax return to make sure that all of the information is correct. If you spot any mistakes, be sure to correct them right away. Second, if you’re owed a refund, be sure to file your return as soon as possible so that you can get your money back. Finally, if you owe taxes, contact the IRS to discuss payment options. Furthermore, don’t forget to include this income when calculating your taxes or you could end up owing a significant amount of money to the IRS.
Taxation of Social Security Benefits
If you have retirement income from other sources, a portion of your social security benefits or social security income may be taxable. The amount of taxes on social security benefits or taxes on social security income that are subject to taxation depends on your total income from all sources as senior retirees. If your total income is below a certain threshold, none of your social security benefits or social security income will be taxable. If your total income is above the threshold, a portion of your social security benefits may be subject to taxation. The exact amount depends on your individual circumstances. However, only up to 85% of your social security benefits can be taxed.
Pension income
A pension is a retirement plan that provides a monthly pension income in retirement. Unlike a 401(k), the employer bears all of the risk and responsibility for funding the plan. A pension is typically based on your years of service, compensation, and age at retirement. Your pension benefit is calculated using a formula that takes into account these factors, and it is paid to you as a taxable income. If you have a pension, you may be able to receive pension income as early as age 55, but most people wait until they reach retirement age (65 or 67, depending on when you were born). Again, pensions are often taxable income, which means that you will pay taxes on the pension income you receive each month. If you’re considering retiring soon, and initiating your pension, be sure to check with your human resources department to find out how your pension works and what you can expect to receive in benefits.
What about the Estate Tax?
An estate tax is a levy assessed by the federal government (IRS) and a number of state governments on estates whose value exceeds an exclusion limit set by law. The amount that exceeds that minimum threshold is subject to tax. These levies are calculated based on the estate’s fair market value (FMV) rather than what the deceased originally paid for its assets. The tax is levied by the state in which the deceased person was living at the time of their death. The IRS provides an exclusion limit, which is the maximum value of an estate that can be passed on to beneficiaries without being subject to estate tax. For 2020, the exclusion limit is $11.58 million. Estates that are valued at more than this amount will be subject to estate tax.
Gift and Estate Taxes
When it comes to taxes, death is not necessarily the end. The IRS imposes an estate tax on an individual’s assets and estate after death. However, there are ways to avoid this tax. One way is to gift assets before you die. The federal gift tax applies to assets that are given away in excess of certain limits while the taxpayer is living. According to the IRS, the gift tax applies whether the donor meant the transfer as a gift or not. So, if you’re thinking about gifting assets to your loved ones, be sure to consult with a tax advisor first to make sure you stay within the law.
Gains Upon the Sale of Your Home
When you sell your home, you may be able to exclude some or all of the capital gain from the sale from taxable income. To figure out the taxable gain, subtract your basis (generally your cost) from the proceeds of the sale. If you have owned and used the home as your main home for at least two of the five years before the sale, you may qualify for this exclusion. The maximum amount that can be excluded is $250,000 if you are single or head of household, or $500,000 if you are married and filing a joint return. If you have rented out part of your home, you will need to figure your taxable gain by taking into account depreciation and other factors. You can get more information on this topic from the IRS website or by speaking with a tax professional.
SET UP A CALL OR WATCH MY FREE VIDEO
If you want, set up a 20 minute call with Thomas Cloud, Jr., CFP(R) to discuss how you may be able to lower your taxes in retirement then click here and schedule it now: https://calendly.com/thomascloud/retirement-ready-success-call. You may be wondering if you are reducing your taxes as much as legally can. The laws change regularly and we stay on top of them and have been helping our clients reduce their taxes during retirement for over 20 years. There is no cost or obligation. Also I encourage you to watch my free retirement video: https://go.thirdactretirement.com/strategy.