Are you happily anticipating your upcoming retirement? Well, try not to forget about your upcoming retirement tax issues. The majority of retirees receive less income than when they worked full time. As such, they assume they will have fewer taxes. In some cases, this is not true. Retirement tax planning is the key to avoiding serious tax issues.
As a retiree, you often have many sources of income, which can complicate your entire tax situation. You may have Social Security income, investment property income, part-time income, or tax-advantaged retirement accounts. All these incomes dictate certain levels of required distribution.
Different Income Sources Equals Different Taxes
Different income sources bring their own tax headaches. They also require some education and retirement tax planning. Consider these sources of income you may have following retirement and the tax implications of each.
- Income from Social Security. This replaces approximately 40 percent of the wages you received before you retired. When first conceived, Social Security payments were not taxed. Yet, today’s retirees must pay taxes on their Social Security check. How much money you receive over and above your Social Security earnings will determine what portion of your monthly check becomes taxed. This can be anywhere from 0 percent to 85 percent. Where you live will determine the state taxes removed from your Social Security benefits. The only exception to these rules are recipients who have no income other than the Social Security check they receive every month.
- Withdrawals from IRA and 401(k) retirement accounts. Usually, the government will deduct taxes from most retirement accounts—except for Roth IRAs. When you turn 70 ½, the government requires you to withdraw money from your retirement account. The reason for this is so the IRS can finally get “its” share of your earnings. If you fail to take out the amount required by the IRS, you could find yourself facing a stiff penalty—up to 50 percent on amounts not “properly” disbursed. The level of tax you pay on your retirement accounts will depend on your overall tax bracket and your total income and deductions.
- Pension benefits. These are almost always taxed. If the money that went into your pension fund was not taxed, then the government will deduct taxes upon withdrawal. In rare cases, some individuals may have funded a portion their pensions with after-tax dollars. In this case, that portion would not incur taxes.
- Annuity taxes. Annuity taxes depend on the type of annuity. On an immediate annuity, only the interest portion is taxable income. On fixed and variable deferred annuities, you will not pay taxes on the annuity gains until you withdraw.
- Interest income, capital gains, and dividends. Taxes on these earnings are the same as they were prior to your retirement.
According to Forbes, assuming you will have fewer taxes in retirement is the number one mistake made by retirees. Paying less taxes does not automatically happen upon retiring. Those who do pay less in taxes do so only because of good planning or a significantly lower income.
Contact Our King of Prussia Tax law Firm Today
Retirement tax planning to minimize your tax liability can make a huge difference for those on a fixed income. Be proactive and take the time to speak to a King of Prussia tax law firm that can help you. A Pennsylvania tax attorney can ensure that you keep as much of your income as possible after retirement. At Troncelliti Law Associates, our tax attorneys are here to help you during retirement. Call us at (610) 365-4240 or fill out our confidential contact form to schedule a free consultation about retirement tax planning.