Retirement planning involves being able to set a target amount of money to live on—a hard thing to figure out with all of today's uncertainties. One big part of the puzzle is how much you will be paying in taxes on retirement money. Fortunately, there are some ways to understand how your taxes will change in retirement. And much of it is for the better.
What You Won't Pay
First, there's some good news for retirees: disappearing taxes. Some taxes levied on workers' income do not follow into retirement. Money drawn from retirement accounts is not subject to FICA - which is Social Security and Medicare taxes. This is a savings of 7.65% right off the top (6.2% is withheld as of 2015 for the employee's share of Social Security taxes and 1.45% for Medicare taxes). Retirees who worked as independent contractors will save double that amount due to being subject to self-employment tax while earning income.
Social Security Benefits
The amount of taxes you'll owe on Social Security benefits will depend on the amount of other income you have and will range from 0% to 85%. Generally, if Social Security benefits are your only source of income, they remain tax-free. To determine the taxable portion of Social Security, add up all your source of income and add the following:
If this amount is more than $25,000 for individuals and $32,000 for joint taxpayers (as of 2014), you may pay on 50% of your Social Security benefits. If the amount is more than $34,000 for single taxpayers and $44,000 for married couples, you may pay taxes on up to 85% of those benefits.
Filing Thresholds and Deductions
Taxpayers older than 65 may also pay less tax on the same income they had while younger thanks to increased exemptions, deductions and even the threshold at which you must file taxes. As of 2014, for example, a married couple under 65 must file once they have received $20,300 in wages or other income. By contrast, that same married couple over the age of 65 won't be subject to income tax until they have reached $22,700.
The reason for these higher filing thresholds is the same as another benefit for retirees: increased standard deductions. Taxpayers over age 65 receive an additional $1,250 to $1,550 to add to their standard deductions (the amount of tax-free income allowed on their federal returns). Certain other deductions (such as retirement contributions) increase at 65 as well.
The best way to deal with trying to figure out your retirement tax bill is to work with a professional accountant who has experience in preparing taxes. Make an appointment with a firm like Jeff Baker & Associates, PS to discuss all your retirement income sources and how they will be taxed as well as how you might be able to structure your income in order to avoid unnecessary taxes. And then you can get out and enjoy retirement instead of worrying about it.Share
10 June 2015
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