Retired? Tax Tips for Retirees
Your 9 to 5 job may cease, but dealing with the tax man does not. Hopefully you’ve long contributed to an IRA or 401k, and have a finance plan for the remainder of your life. As you prepare for your time as a retiree, take in these tips to build upon the foundation you’ve put down.
Know How Your Finances Will Change
A likely reality for retirees is a drop in income, therefore moving into a lower tax bracket, accompanied by fewer eligibilities for deductions. This is certainly something to prepare for. Unfortunately, your fixed-income payments still generate taxes, while the opportunities for deductions (like business-related ones and having dependents) become more scarce. Know how much you’ll be taking in from Social Security and savings, and compare this against the deductions you’ll be losing.
Be Aware of the Advantages
There are certainly advantages to being a retiree in tax terms – most benefit from a decrease in income tax and the ability to withdraw money from retirement accounts with no penalty.
As for deductions you can take, medical and dental expenses become a larger win. If you sell your house to move into a smaller one or a community, you may not have to pay any tax on your profit. Up to $250,000 for single taxpayers and twice that for married couples filing jointly is not taxable.
Now for accumulating wealth while you’re retired. First, don’t forget you can still contribute to your IRA, or convert it to a Roth IRA. Apart from putting away money to grow it, the best way to earn money as a retiree is in the form of interest, dividends, and capital gains from investments. These gains are taxed at lowered rates than regular income, peaking at 20% if you’re in a high tax bracket. They are also not subject to Social Security or Medicare taxes. Additionally, fees that you incur for investment advice, accounting services, and the like are deductible.
…And the Disadvantages
Many taxpayers who have contributed to their retirement accounts are unaware they taxes come with distributions, and up to 85% of Social Security is also taxed.
Speak to a tax professional about understanding the shift of your financial situation – and how you can benefit from it instead of feel tied down.