Income Taxes and Retirement
Retirement brings many changes. However, many retirees are still required to file income tax returns and pay income taxes. More than one person has asked me when they can stop filing. It seems to be a fairly common myth that after a certain age, filing taxes is no longer required.
Tax return filing requirements are based on annual income. Because taxpayers over 65 have a higher standard deduction the amount of income needed to trigger a filing requirement is higher, but there is no magic age limit. No matter how old you are, if your income is high enough, you’ll be required to file a tax return.
Do I have to file a tax return?
To help you determine whether you have a tax return filing requirement, the IRS has created an interview to help you: https://www.irs.gov/uac/do-i-need-to-file-a-tax-return
What income is taxable?
Most income in retirement is taxable. Interest, dividends, pension payments, and traditional IRA distributions are all taxable income. Of course, if you’re still working, your wages will be taxable, and you’ll continue to pay Social Security & Medicare taxes on your wages too. Examples of non-taxable income include qualified Roth IRA distributions and tax-exempt interest.
Up to 85% of your Social Security income may be taxable as well. The amount is determined by your total income and filing status. This IRS Tax Tip has the details: https://www.irs.gov/uac/are-your-social-security-benefits-taxable.
During your retirement, you may have different sources of income to draw upon, which brings great tax planning opportunities. The types and amounts of income, your age and your age at retirement, your income needs and how all of these parts interact with the tax code are among the factors that should be considered as you move through your retirement years.
Your financial planner can recommend what sources to draw from and when so that your income is taxed as efficiently as possible during your retirement.
Written By Melissa L. Spoharski, EA