When you think about your retirement, what usually comes into your brain are all the times when you will sleep late, dress comfortably, and spend most of your time doing just about anything you want to do. The everyday grind of fighting traffic and the routine at work—and even worse the pressures of it—will be far behind you when you retire and you cannot help but think about the good things that retirement will bring. But is that all a reality?
When you’re younger, you may spend some of your time trying to avoid paying taxes and stay up on all of the tax law changes to do it. Here are some of the ones everyone under 50 should know right now.
Tax Deductions and Credits for Younger Adults
Millennials, like every generation of taxpayer, can still deduct many expenses on their taxes. This applies if the nature of the expense and their circumstances qualify. These common deductions include:
- Moving expenses – if not reimbursed by an employer
- Part of a self-employed taxpayer’s self-employment tax
- Self-employed retirement and retirement plan contributions
- Student loan interest (tuition and fees if not claiming an education credit)
- Mortgage interest for homeowners
- Real estate taxes
- Tax on vehicles, motorcycles, and boats
- State and local income taxes (or sales taxes, at the taxpayer’s option)
- Charitable contributions (with limits)
- Expenses for an office in the home
There are also many tax credits even younger adults can take advantage of, such as child credits, lifetime learning credits for education expenses, child and dependent care credit, and the earned income credits (designed for lower-income taxpayers including millennials…if eligible).
I used to spend a lot of time trying to figure out how I could pay as little in taxes (legally of course) as I could every year. I was fairly successful at it and tried not to have to pay. More often than not, I got a tax refund for real reasons I was entitled to them and not simply because I had too much withheld from my pay every week to get it! Don’t ever do that.
Senior Taxes and You
When planning for your retirement, it’s fun to contemplate the travel, rounds of golf, and restaurant meals (yes, those days will return eventually) you have ahead of you. However, many retirees don’t think about taxes, and they can have a real cumulative impact on your life and finances after you finally make it to retirement.
Federal and state income taxes don’t go away after you retire and can wreak havoc on your retirement nest egg. You need to think about it before you retire and have a strategy in place for how will you pay taxes in retirement.
Is It True What They Say About Death and Taxes?
There’s an old expression my mom used to remind me of and that is this:
“In this world nothing can be said to be certain, except death and taxes”Benjamin Franklin (in a letter to Jean-Baptiste Le Roy, 1789)
While death is something we do sometimes think about as we get older, taxes…not so much. The news is this: taxes don’t go away after retirement, but you can soften the blow of them if you know what to do when the time comes.
Even as you age, there are certain ways you can save on your tax bill and I have written about some of them before.
One of those things is getting help filing your taxes without having to pay an excessive hourly fee. The Tax Counseling for the Elderly program provides free tax assistance to those age 60 and up and you can get free IRS-certified volunteers to assist you with basic tax return preparation and electronic filing until April 15 each year. The TCE program specializes in tax issues seniors typically face, including tax questions about their pensions and retirement benefits.
Make a note of them for your future use, but that’s just the tip of the iceberg when it comes to tax help.
10 Overlooked Important Tax Breaks for People Over 50
To help avoid paying taxes in retirement, here are some important overlooked tax breaks:
- Bigger standard deductions (over age 65)
- Higher tax-filing threshold (over age 65)
- Larger property tax breaks (over age 65)
- Credits for the elderly and disabled (over age 65)
- Additional IRA deduction amounts (over age 50)
- 401(k) catch-up contributions (over age 50)
- No IRA early withdrawal penalties (over age 59½)
- Qualified charitable contributions (with limits)
- Higher HSA contribution limit (over age 55)
- Free tax help
Taxes on Retirement Income
Most forms of retirement income including Social Security benefits as well as withdrawals from your 401(k)s and traditional IRAs are taxed*. Unless you live in one of the states without a traditional income tax, you can expect your home state to ding you in retirement as well.
*Taxes on retirees vary from state to state, so make sure you check your state’s overall tax impact on your retirement income.
Your income in retirement will probably start with Social Security payments. But that won’t be all you need to concern yourself with when it comes to taxes. Here are the other sources of income in retirement that will be subject to potential tax:
- Traditional IRA account withdrawals (Roth accounts are not taxed)
- RMD (required minimum withdrawals after age 72)
- 401(k) withdrawals
- Pension payments
- Stocks, bonds and mutual funds (that you’ve held for more than a year then proceeds are taxed at long-term capital gains rates)
- Taxable municipal bonds
- CD, savings account, and money market account interest payments
- Savings bonds
- Any earned income from a job, hobby, or side gig
Not all of these items are taxed by individual states so it’s important to know and understand when considering where you will live in retirement.
Some people in retirement actually find out that they can and will pay more in taxes than they did when they were working. How?
This is because they’ve begun to collect Social Security, have more interest and dividends being paid to them from their portfolios due to their allocation being more conservative, and are also required to take RMDs or required minimum distributions from their 401(k) or IRA, which will subsequently be taxed. With proper planning, you can save yourself potentially thousands of dollars in taxes during retirement.
As crazy as it may sound, it’s never too early to think about such things as taxes in retirement. That’s the purpose of planning ahead. If you try to figure all of these things out when you are close to or in retirement, you will be confused and pressured and probably not be able to adjust it all to limit your tax liability to the max. Why not take some time before all of that when you are not under the gun and do it before you have to face it?
Have you thought about retirement and taxes? Are you nearing retirement age? What will be your sources of income in retirement? Are you ready for it and is your income “tax ready”?