Tax planning for retirees may sound simple on the surface. Since they typically have lower incomes and fewer deductions compared with many taxpayers, they don't face such a comprehensive range of tax issues, right? Well, not exactly.
Not Considering Taxability of Social Security
Many people believe that Social Security is not taxable. This is not entirely accurate. In fact, up to 85% can be subject to income tax.
Retirees with minimal income will not pay federal taxes on their benefits. However, if they have additional income, a percentage becomes taxable. Retirees need to calculate their “provisional income” as follows:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Take your adjusted gross income (excluding Social Security)
- Add any tax-free interest received (typically municipal bond interest)
- Add to that total 50% of your Social Security benefit
If the income is below $25,000 for single filers or $32,000 for joint filers, your benefits are all tax-free. If the provisional income is between $25,000 and $34,000 as a single filer or between $32,000 and $44,000 as a joint filer, you are taxed on up to 50% of your Social Security benefits. However, if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you will be taxed on up to 85% of your benefits.
I would recommend that retirees review taxable income annually with their tax adviser to determine if any additional income impacts the taxation of Social Security. This may also put the taxpayer in a higher tax bracket. If careful planning is not completed, the result could be an unpleasant surprise come tax time.
Summary
Tax planning for retirees may not be as simple as you think. Seniors face different circumstances compared with younger taxpayers.
But with careful planning and understanding your tax situation so you can minimize your tax liability and sleep at night. Don’t fall victim to tax strategies that will cost more tax at the end of the day.
-
Are Democrats or Republicans Better for My Insurance Premiums?Let's compare how these two political parties might affect your insurance premiums now that the 2024 election is over.
-
Four Financial Steps That Can Help the Sandwich Generation CopePeople who are caring for kids and aging parents at the same time can take a hit mentally and financially, so make sure you're tapping into all available help.
-
Three Easy But High-Impact Moves for RetireesKeeping finances in order is a chore, especially in retirement, but these three simple and impactful moves will help you now (and your heirs in the future).
-
Buckle Up: Five Risks to Avoid on the Road to RetirementAs retirement approaches, keep an eye out for the last remaining bumps in the road that could put a serious dent in your hard-earned savings.
-
Ignoring Your Company's Dress Code Can Get You FiredEmployers and prospective employees need to be upfront about expectations on the job regarding appearance, and other policies, before a job offer is accepted.
-
Tony Bennett's Daughters Share Thoughts on How to Prevent Inheritance DisputesOther families, especially high-net-worth ones, can benefit from Johanna and Antonia Bennett's experience encountering estate disagreements.
-
How to Grow Your IRA in Retirement Rather Than Spend It DownYou really can defer RMDs and lower taxes while at the same time increasing the long-term growth of your IRA. Here's how.
-
Four Perfect and Powerful Financial New Year's ResolutionsWhile you're vowing to get in shape, eat better and practice a better work-life balance in the New Year, don't forget to consider your finances.
