Before you know it, Tax Day will be here, so it’s best to start getting ready now. Beyond your tax bill this year, don’t forget about your tax bill in the future, even in retirement. Taxes don’t stop when you stop receiving a paycheck, and they could be one of your biggest expenses in retirement. You should understand how different types of income are taxed and create a plan that works to lower your taxes throughout retirement.
Your Social Security Benefit Can Be Taxed
To figure out if your benefit can be taxed, add up your adjusted gross income, nontaxable interest, and half of your Social Security benefit to get your combined income. If your combined income as an individual is between $25,000 and $34,000 or is between $32,000 and $44,000 as a married couple filing jointly, up to 50% of your benefit may be taxable. And, if your combined income as an individual is over $34,000 or over $44,000 as a married couple filing jointly, up to 85% of your benefit may be taxable.1
Retirement Account Distributions
Investments that are held for one year or less are considered short-term capital gains. Short-term gains are taxed at ordinary income rates. However, investments that were held for over a year (long-term capital gains) are taxed at either 0%, 15%, or 20%, depending on income level.2 Although you’ve likely held investments in your 401(k), IRA, 403(b), 457, or Thrift Savings Plan for over a year, withdrawals are taxed as ordinary income. Keep in mind that at age 72, you will most likely be required to take minimum withdrawals from your tax-deferred retirement accounts. Amounts are set by the IRS and may force you to withdraw more than you normally would in one year. This could mean an increased tax burden.
Many people are buying and selling homes right now, and whether or you are or not, you should know how home sales are taxed. At any age, you can take $250,000 tax-free from a home sale if you meet certain requirements, including occupying the property for 2 out of the last 5 years. This doubles to $500,000 for married couples.3 Keep in mind that this does not apply to other property sales, only primary residences.
Annuities can potentially offer certain tax benefits. Annuities can be purchased with pre-tax dollars, in which case payments would be taxed as income. However, annuities can also be funded with after-tax dollars, in which case taxes would only be owed on the earnings.4 There are many options when it comes to annuities, and a professional can help you pick one that fits with your overall finances and retirement goals.
Tax and income planning are important parts of a comprehensive retirement plan, and we make sure to include them. We could see rising taxes in the future, so now is the time to prepare. To start exploring tax minimization strategies in retirement, call our office at (435)773-9444 to schedule your complimentary visit.
- Income Taxes and Your Social Security Benefit
- Topic No. 409: Capital Gains and Losses
- Capital Gains Tax on Home Sales
- Annuity Taxation
Investment advice is offered through APO Financial Services, LLC (“APO”) 10155 Westmoor Drive, Suite 175, Westminster, Colorado 80021-2627. APO Financial Services is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration with the SEC as an investment adviser should not be construed to imply that the SEC has approved or endorsed qualifications or the services Eric Scott Financial and/or APO Financial Services offers, or that its personnel possess a particular level of skill, expertise or training. Additional information pertaining to APO’s registration status, its business operations, services and fees, and its current written disclosure statement is available on the SECs Investment Adviser public website at https://apofinancial.com/disclosure/.