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4 Important Tax Items Every Retiree Should Know About

Retirement may mean that you’ve stopped working, but it doesn’t mean that you’re finished with worrying about taxes.

Many people think when they get to retirement they’ll be in a lower tax bracket. But the reality is that taxes in retirement can be more confusing, a bit trickier, and just as much as part of your financial reality as when you were working.

There are a wide range of tax implications for retirees, and having a good working knowledge of what those are ahead of time can reduce stress and make that hard-earned retirement more enjoyable. Here are four fundamental areas that are important to know:

  • Much of retirees’ income is still taxable. Some sources of income are automatically taxed, but with other sources you must request that taxes be withheld. You may need to consider filing quarterly estimated taxes if you’re not having taxes withheld from your distributions.
    For example, with your Social Security check the taxes will automatically be withheld. With your 401(k), 20 percent is automatically withheld from any distribution, which may be more or less than your tax liability. With pension payments, IRA distributions and annuity payments, you can request to have taxes withheld – or not.

For example, with your Social Security check the taxes will automatically be withheld. With your 401(k), 20 percent is automatically withheld from any distribution, which may be more or less than your tax liability. With pension payments, IRA distributions and annuity payments, you can request to have taxes withheld – or not.

Here’s where it can start to get a bit complicated. Let’s take your 401(k) or IRA, for example. You co-own those with Uncle Sam and they’re taxed as ordinary income when you withdraw money from them.

But those withdrawals can have an impact on the taxes you pay on your Social Security benefit. If you take too much money out of your 401(k) – well, congratulations, now your Social Security can be taxed at 50 percent, or 85 percent, as ordinary income.

These are examples of how taxes in retirement can get stacked upon one another. That’s why retirees need to understand the difference between tax preparation versus tax planning. Tax preparation is what you do with your CPA every year. The CPA sits down and calculates history. In other words, this is the money that comes in, and this is what you owe in taxes. But tax planning is asking the question: “How can I owe less by strategically planning today?”

The Tax Cuts and Jobs Act of 2017 enables retirees to pay taxes while taxes are actually on sale, basically through the end of law at the end of 2025. It reduces five of the seven tax brackets. If the brackets go back up after 2025, you’ll basically be retiring into a higher tax bracket. So for the next seven years, retirees are afforded some opportunities to take advantage of the tax law, such as by considering a Roth conversion.

  • Medical expenses are deductible. This deductible isn’t as generous as it used to be, and it’s essentially for people who have significant medical expenses. But it’s important to keep track of all those from the beginning of a tax year, even if you are in good health. If an unwelcome surprise occurs that leads to high medical bills, you want to have documentation as you go along.

Beginning this past January, all taxpayers may deduct only the amount of the total unreimbursed allowable medical expenses for the year that exceeds 10 percent of their adjusted gross income. Taxpayers often overlook these medical expenses: hearing aids, medical equipment, doctor’s visits, out-of-pocket payments for lab tests, prescriptions, premiums for Medicare Parts C & D, eyeglasses, and long-term care insurance premiums.

  • Credit for care of an aging parent. If a retiree is caring for an elderly parent, you may be able to claim a $500 credit. They have to meet certain criteria: they must be related to you, a citizen of the U.S. or residing in Canada or Mexico, and cannot have a gross income of over $4150.

Additionally, the requirements are that a retiree and spouse can’t be claimed as dependents by someone else; the elderly parent isn’t filing a joint return and isn’t claimed by someone else; and the retiree paid for more than half of the parent’s support for the calendar year.

  • Gifts and charitable donations. This is a big part of the story because many retired people like to give to charity. Yet, charitable giving has changed for many retirees because the new tax law raised the standard deductions and, for many people, took away itemizing.

It’s important first to know that a gift is different from a charitable donation. In the IRS term of a gift, you can give $15,000 to an individual or organization tax-free. You must file Form 709, disclosing the gift, but gifts are not tax-deductible.

In terms of charitable donations, one way for a retiree to get credit for it is through the Qualified Charitable Distribution (QCD). It’s taken directly from their retirement account and paid to the charitable organization. Going that route, it acts as an itemized deduction.

As you head into retirement, it’s crucial to understand all the tax implications. After working so hard for so many decades, you want to make sure you get the most out of all those dollars you saved and earned.

Investment Advisory Services provided by Hobart Private Capital, LLC a SEC Registered Investment Advisor. Insurance services offered separately through Hobart Insurance Services, LLC. We do not provide, and no statement contained herein shall constitute, tax or legal advice. You should consult a tax or legal professional on any such matters.
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