When you retire, you may think your tax bills will be smaller, tax returns simplified and you no longer have to perform tax planning. While this is possible, a lot of people find this to not be the case, as the combination of Social Security, withdrawals from retirement accounts and pensions can raise their income in retirement and may move them into a higher tax bracket.
You may want to consider the following tax-planning tips if you are retired or approaching it:
Consider your Social Security Benefits Timing
From the ages of 62 and 70, you can start receiving Social Security benefits. The benefits you receive will be greater the longer you wait, so if you do not require the money at the moment, you may want to consider putting it off. These benefits are reduced should you begin them before you are at retirement age.
Figure out how much money you will need for living expenses and inventory your income sources for when you retire. Some examples of this are taxable assets such as brokerage and mutual funds; tax deferred assets like IRAs, pensions, and 401(k) plans; and nontaxable assets such as Roth 401(k) plans, Roth IRAs, and tax-exempt municipal bonds. Depending on your sources of income, Social Security benefits may also nontaxable or partially taxable.
Track Medical Expenses
Medical expenses are deductible, but only if you itemize and only if they exceed 7.5% of your adjusted gross income. Keep track of your significant medical expenses. If you exceed the threshold or are close to it, you can maximize potential deductions by bunching elective expenses into the year.
Qualified Charitable Distributions
Once you reach the age of 72, you’re required to begin RMDs from tax-deferred retirement accounts (up from 70½ for people born before July 1, 1949) however you can defer your first distribution until April 1 of the year after the year you have reached 72. Generally, RMDs are taxed as ordinary income and you must take them regardless of if you need the money or not.
Pay Estimated Taxes
The sources of income while you are retired may or may not withhold income taxes. In order to avoid any surprise taxes and penalties, it’s a good idea to estimate if your withholdings are going to be sufficient to pay the tax liability for the year, and make estimated quarterly tax payments in order to cover an expected shortfall.
To learn more about tax tips for retirement, contact our experts at Perfect Balance Accounting Services now! We offer tax planning, accounting services, QuickBooks management, business payroll, and more in the Racine and Kenosha areas for individuals, businesses, and non-profits.