Don’t Let These Retirement Tax Surprises Hurt You – Todd Carmack
Three Tax Surprises You Should Watch Out For When You Retire
Taxes are unavoidable in every stage of life, including during retirement. Retirees are required by law to pay different forms of taxes on their benefits. While you are preparing for retirement, you should also consider the taxes you must pay. Failure to do this could result in serious financial troubles later in life.
Here are the major key tax issues to keep in mind while planning for retirement:
Expect Taxes on Social Security
It could be surprising for seniors to find out that they have to pay federal taxes on their Social Security benefits. And these taxes do not necessarily consider retirees’ income levels. Whether your income is high or low does not determine if you will pay taxes on your Social Security benefits or not.
To calculate your post-retirement Social Security taxes, the IRS uses your provisional income, which is the sum of your non-Social Security income and 50% of your total annual benefits. An unmarried recipient whose provisional income exceeds $25,000 will have 50% of their benefits taxed. They could also have 85% of their benefits taxed if their provisional income is beyond $34,000.
On the other hand, couples enjoy slightly more freedom on their benefits. If their provisional income exceeds $32,000, they have to pay taxes on 50% of their benefits. If it exceeds $44,000, they pay taxes on 85% of their benefits. The limit might seem more considerate for couples, but that is probably because the rules have not been revised in decades.
That is just for federal taxes. Most states do not tax Social Security benefits, but the following states do:
• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• Utah
• Vermont
• West Virginia
If you live in any of these states, you will have to cough up more of your Social Security benefits to fulfill your tax obligations.
Extra Tax Burdens from RMDs
Required Minimum Distributions (RMDs) tend to add more tax pressures to your finances. As soon as you turn 72, you will be required to make withdrawals known as RMDs from your traditional IRA. However, you will avoid the extra taxes with a Roth IRA.
RMDs also increase your provisional income. If the increase is significant enough, you might need to pay even more taxes on your Social Security benefits. To avoid the extra tax burden that comes with RMDs, you should consider using a Roth IRA instead of a traditional IRA. If your income is too high for a Roth IRA, you should consider converting your traditional IRA to a Roth IRA instead.
You May to Pay More on Property Taxes
While many individuals are lucky enough to pay off their mortgage before retirement, the battle does not end there. They still have to contend with property taxes, which are compulsory and bound to rise with the property’s value. If your property taxes rise exponentially, the only solution is to appeal to the rise and hope for the best.
Taxes are generally cumbersome, but the worst can happen if you fail to consider them when making retirement plans. Adequate awareness and proper preparation for unavoidable taxes could save you from a lot of unpleasant surprises and financial difficulties during retirement.
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Bio:
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.
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