Taxes in Retirement Look Different Than Most People Expect
Doing your taxes in retirement could be a little more complicated than doing your taxes while working. Depending on your income, Social Security checks may or may not be taxed – let’s talk about those numbers... Plus, you'll have to pay federal income tax on most retirement plan withdrawals (and state taxes depending on which state you live in).
Combined income determine Social Security taxes
Remember we were just talking about how your Social Security benefit is taxed? Well, how much you pay is determined by "combined income." Think adjusted gross income, plus any non-taxable interest, plus half your Social Security benefit (no on like math, I get it). So, if that combined income is below $25,000 and you're single, your benefit won't be taxed. If it’s between $25,000 and $34,000, you could pay on up to half of your benefits. Finally, if it’s over $34,000, up to a whopping 85 percent of your benefits could be taxed. That seems pretty high to us.
But don’t misunderstand us. When we say that 85% is taxable that doesn’t mean you’re losing half or more of your benefit to the man. Instead, that means 85 percent of the 100 percent that is your entire benefit can be taxed at your normal income tax rates.
State tax can grab another chunk
Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia all tax Social Security benefits to some extent. Time to move?
No state tax in these 7 states
How about one of these states? Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax only dividends and interest. Thank goodness.
Minimum distributions could trigger higher taxes
You’ll have to begin withdrawing money from most retirement accounts by age 70.5. Required minimum distributions are typically taxed at your regular income tax rates. If you've saved enough, you could be big enough to push you into a higher tax bracket (punished for saving money, what’s next).
It can make sense to change over some retirement funds to Roth IRAs in your 60s to maneuver around that tax increase.
Selling your home? Expect unexpected tax bills
Selling your home, for any reason, means you’re probably getting hit with a tax bill. If you've called this home your primary residence for at least two out of five years before selling, you can exempt up to $250,000 of home sale profit from capital gains taxes, and double for a couple.