Taxes in retirement

As you go through life, you will encounter several "life-changing" moments.  Some are good, such as graduating college or having a child, while others are bad, such as losing a parent or going through a divorce.  These moments can also bring changes to your financial life, including how much tax you owe and how it is paid.  

This article addresses taxes in retirement.  I realize this is not chronologically accurate, but it is an issue that several people are not prepared for when they enter retirement.  

Income and deductions

A retired taxpayer will likely have very different income and deductions than they had earlier in life, maybe even than the year before.  Their wage income will be replaced by distributions from retirement plans, investment income and Social Security.  Personal exemptions for children and mortgage interest will be replaced by charitable contributions and medical expenses.  Changes in income and deductions must be considered when determining how much tax will be owed each year.

Social Security

There's no easy way to say it: if you have other sources of income, up to 85% of the gross Social Security benefits you receive are taxable.   This often comes as a surprise to retired taxpayers, because there is often no tax withholding against this income.  However, you can elect to have Federal withholding taken from your SS benefits if you don't want to change the withholding on your retirement distributions.  Fortunately, SS benefits are not taxed in several states.

Paying taxes

The most challenging part of determining taxes in retirement is determining your income from all sources and electing tax withholding to cover all of it (or pay estimated taxes).  If you are taking distributions from a retirement plan, they will give you the option to withhold taxes on that distribution.  But, this withholding will be based on that distribution alone, and most likely will not cover investment income or Social Security benefits.  The key is to set your withholding high enough to cover taxes on all of your income, not just one source.  

In all, it is important for individuals that are nearing or entering retirement to meet with their tax advisor to determine tax implications of retirement.  Your tax advisor will consider changes in your income and deductions and advise on how much to withhold from retirement distributions or quarterly estimated tax payments that need to be made.  

Summertime tax tips

As the summer comes to a close we find ourselves at a transitional point in the year.  The kids are trading in their swimsuits and long days at the pool for backpacks, school supplies, and sack lunches.  I know with the temperatures hanging out in the 90's and 100's it's hard to believe, but fall will be here before you know it.  As this transition in the year happens, it also presents a good opportunity for people to do a little mid-year tax planning.  Below I have listed out a few things to consider as we enter the last five months of the year.

Clean out your closet

Take a look at your closet right now.  Do you see anything hanging up that you haven't worn all summer?  Maybe since last summer?  This is a great chance to go through your closet and bag up any clothes, shoes, and accessories that you feel comfortable passing along to a new owner.  Put all those clothes in a box or a bag and drive them down to your local charity (such as Goodwill) and make your donation.  Don't forget to get a donation receipt, fill out your personal information, list your donated items and assign a conservative value to them.  

Look at your FSA and HSA balances

There are five months left in the year.  But in those five months, you will probably go to the doctor and the dentist at least once, maybe the eye doctor, and possibly have to fill a prescription.  If you have sporty kids at home, you'll probably also been spending some time getting physicals for their various activities.  If you participate in an FSA, HSA, or flex spending account with your employer, this is a good time to see what your balance is, how much you expect to contribute for the remainder of the year, and compare that to your expected expenses.  Remember, in most of these plans you have to use it or lose it.  

Amended tax info

Is there an ominous envelope sitting on your counter at home with the words "IMPORTANT TAX INFORMATION ENCLOSED" that you haven't had a chance to open?  There's a good chance it is from your investment broker with corrected tax reporting information regarding your investments.  Or, it could be from your mortgage company discussing private mortgage insurance premiums.  Either way, you should take a look and discuss with your tax preparer to see if you need to amend your tax return.  

Changes in tax situation

Has 2013 been a year of change for you?  Maybe you bought your first (or third) house, maybe you had your first (or third) kid, or maybe you got nervous and sold a big part of your investment portfolio to avoid the ups and downs of the market.  All of these changes could have an impact on your 2013 tax return which could result in you getting a big refund or having a big balance due in April 2014.  To avoid this, talk with your tax preparer about the changes in your situation, your year-to-date withholdings from your paycheck, and any estimated tax payments you might have already made.  

Get up to date

The "fiscal cliff", "Obamacare", QE3, DOMA...there has been a barrage of news stories about all of these topics and you probably find yourself saying "I feel like this should affect me somehow?"  Well your intuition is correct.  For example, if you expect to make at least $250,000 this year, or you have significant income from investments such as interest, dividends, capital gains, partnerships, etc., or you are a small business owner with employees, then you are right in the crosshairs of several of these changes.  Touch base with your CPA to discuss your situation and consider any planning moves you can make in the closing months of the year.