As you approach retirement, it’s important to understand the tax implications. Here are five things to keep an eye on.
Retiring means many life changes—not having to worry about the daily grind, pursuing passions, spending more time with friends and family.
One retirement change many people don’t think about is the potential effect on their taxes. The rules are a little different for retirees, and age-related factors also come into play. With that in mind, here are five ways your taxes might change once you’ve retired.
“One of the first things I tell people about to go into retirement is to look at your other income,” said Lisa Greene-Lewis, a certified public accountant and TurboTax blog editor. Aside from Social Security, retirees need to look at what other retirement distributions they may be receiving, such as pension, savings, and other funds, she said.
“Those additional streams of income can make your Social Security taxable,” Greene-Lewis said, noting that most people don’t realize this can happen.
She explained that if your earned income totals more than $25,000, Social Security payments can be taxed at 50%. If the earned income is more than $34,000, your benefits can be taxed at 85%. Retirees who file jointly will see those taxes kick in at above $32,000 and $44,000, respectively.
Part-time consulting work and driving for companies like Uber and Lyft have become popular side jobs for retirees, and that means filing self-employment taxes, Greene-Lewis said. In addition to W-2 forms, you may see forms like the 1099-MISC, which is payment for services to an independent contractor. Another is a 1099-K, for those who use third-party merchants like PayPal for payment. That form may arrive if you’ve had 200 transactions or total payments over $20,000, she said.
On the other hand, drivers may also get tax deductions. According to the IRS, you can either take the standard mileage deduction, which is 53.5 cents per mile for 2017, or deduct the actual operating expenses of the vehicle.
As you move through your retirement years, it’s important to track and deduct medical expenses. When you’re older, medical expenses can really add up. At age 65, if your medical expenses exceed 7.5% of adjusted gross income, you can claim deductions, Greene-Lewis said.
You can generally begin withdrawing from retirement accounts as of age 59 1/2, but at age 70 1/2 distributions become mandatory. Retirees who saved diligently in tax-deferred accounts like individual retirement accounts, 401(k)s, and 403(b)s must start to take a required minimum distribution (RMD). The penalty for failing to take that RMD is steep—50% of the amount that should have been withdrawn, Greene-Lewis said. Further, as you age the RMDs grow. One way around this is to use a qualified charitable distribution, she said. You can exclude up to $100,000 in income from your RMD if the money is sent directly from your IRA to the charity.
But the limit is based on your actual RMD. So, for example, if your RMD is only $45,000, that is the maximum you could exclude from your income. If your RMD is $45,000 and you contributed $100,000 to a charity, $45,000 could be excluded from income and the remaining $55,000 would have to be included in your income but then may be taken as a deduction on your taxes.
Some deductions may change. If you had a mortgage-burning party, well, congratulations. But remember that your mortgage interest tax deduction goes away. Ditto for education deductions if you’ve stopped taking classes. However, Greene-Lewis said, with blended families becoming more common, grandparents may be able to claim grandchildren as dependents if they provide over half of the support of the child. Retirees can claim up to $4,050 per dependent grandchild, she added.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
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