Mistakes could make you pay more in taxes in retirement.
Retirement is a big change.
You will no longer be going to a job each day.
You will have more time to enjoy your hobbies and your passions.
You can spend more time visiting children and grandchildren.
That is all good.
Retirement also means you will need to change your tax strategy to keep more of your money.
You will still be taxed on income.
But the type of income you have will change.
According to a recent Kiplinger article titled “3 Tax-Planning Mistakes Retirees Too Often Make,” many people make common tax mistakes in retirement.
What are they?
It is a common strategy.
You sell investments in your portfolio.
The investments increased in value.
As a result, you would be paying taxes on the gains.
If you utilize a "tax loss" strategy, you will sell a capital asset at a loss.
This would help offset the gain in your portfolio and would offset the tax on the gain.
It sounds great.
But it is not perfect.
Tax laws do not favor stock losses.
Yes, you can offset gains.
But if you have excess losses, you can only take $3,000 of your losses to offset other income for this year.
If the loss is greater, you could carry it forward to offset future years.
However, this would take time to fully make up for the loss in your portfolio.
RMDs that are too small.
Once you reach age 70 1/2 you must begin taking "required minimum distributions" or face stiff penalties.
Taking minimum RMDs can work for many people, as it can help keep them in a lower tax bracket.
Still, there are estate planning benefits to taking larger distributions.
What are they?
By taking larger RMDs, you will be able to enjoy more of your own money.
And you might as well enjoy it yourself.
If a traditional IRA is passed along an heir, then the individual inheriting the IRA will be taxed accordingly.
What happens should the heir choose to take a complete lump sum distribution from the IRA?
Perhaps they want to engage in some high living and extravagant travel.
The money withdrawn will all be taxed as ordinary income.
This would put the heir in a higher (if not the highest) tax bracket for the year of this distribution.
Taxes on Social Security.
Many people think Social Security cannot be taxed.
Unfortunately, this is not true.
Up to 85 percent of your Social Security check could be taxed as income.
How much, if any, is taxed depends on your "provisional" income.
How do you calculate this?
Start with your adjusted gross income minus Social Security.
Add back any tax-free interest you received.
Finally, add 50 percent of your Social Security benefit.
The result is your provisional income.
How is this provisional income taxed?
If your provisional income total is less than $25,000 as a single or $32,000 as a married couple, your benefits will not be taxed on the federal level.
If the income falls between $25,000 and $34,000 as a single or $32,000 and $44,000 as a married couple filing jointly, up to half of your Social Security will be taxed.
Any income higher than these figures triggers taxation on up to 85 percent of your Social Security.
You should review your income regularly to determine whether your additional income could affect your tax bracket.
When it comes to taxes and retirement, planning is key.
Working with an experienced financial planner can help you make the best decisions for your circumstances and goals.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger (December 13, 2017) “3 Tax-Planning Mistakes Retirees Too Often Make”