As you approach the end of your career, it’s important to understand retirement tax strategies. Here are five things to keep an eye on.
Many people don’t take taxes into account when they retire
Consider starting your retirement tax planning before leaving work
Retiring means many life changes. Say goodbye to the daily grind; pursue your passions; and spend 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 when it comes to retirement and taxes, and age-related factors might also come into play. With that in mind, here are five retirement tax-planning strategies you might want to understand before leaving your desk on that final work day.
“One of the first things I tell people about retirement is to look at your other income,” says 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 says.
“Those additional streams of income can make your Social Security taxable,” Greene-Lewis says, noting that, when conducting their retirement tax planning, most people don’t take this into consideration.
She explains that if your earned income totals more than $25,000, 50% of your Social Security payments can be taxable. If the earned income is above $34,000, then 85% of your benefits can be taxed. Retirees who file jointly will see those taxes kick in 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, which means filing self-employment taxes, Greene-Lewis says. In addition to W-2 forms, you may see forms like the 1099-MISC, which reports payment for services to an independent contractor. Another is a 1099-K, which is for those who use third-party merchants like PayPal for payment. That form may arrive if you’ve had more than 200 transactions and total payments over $20,000, she says.
On the other hand, drivers may also get tax deductions. According to the IRS, you can either take the standard mileage deduction, which is 57.5 cents per mile for 2020, or deduct the actual operating expenses of the vehicle.
In your post-working years, an important retirement tax strategy is 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 says.
You can generally begin withdrawing from retirement accounts as of age 59 1/2, but as of January 1, 2020, when you turn 72 distributions become mandatory (If you turned 70 1/2 before 2020 you will also have to take RMDs. Read more about RMD changes due to the 2019 SECURE Act here). Retirees who saved diligently in tax-deferred accounts such as Individual Retirement Accounts (IRAs), 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 says. Further, as you age, the RMDs grow. One potential retirement tax strategy is to use a qualified charitable distribution, she says. 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 if your RMD is only $45,000, that’s the maximum you can exclude from your income. If your RMD is $45,000 and you contributed $100,000 to a charity, $45,000 may be excluded from your income. 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 in retirement. 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. But with blended families becoming more common, Greene-Lewis says, grandparents may be able to claim grandchildren as dependents if they provide more than half of the child’s support. Retirees can no longer take the dependent exemption—which was $4,050 in tax year 2017—as it was eliminated under the new tax law. But you can still claim the Child Tax Credit which increased to $2,000 under the new tax law.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
The key to filing taxes is being prepared. TD Ameritrade provides information and resources to help you navigate tax season.
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