For most of us, throughout our working years our employers took care of all of the major tax contributions we are required to make to the IRS throughout the tax year. Things were pretty clear cut – we made money and our employer withheld Federal, FICA, State and local income taxes.
As a retiree, you are now responsible for sending estimated income taxes to the IRS and State during the tax year.
This is uncharted, confusing and very unfamiliar territory for most retirees.
Consider this, your tax liability during your retirement years should be less than when you were working.
For starters, no more FICA and Medicare tax. The two combined total 7.65% of W-2 income with thresholds in excess of $120,000. This contribution is 15.30% on the same income for the self-employed.
Also, certain retirement income categories are exempt from state income taxation. While it varies from state to state, some forms of retirement income are excluded from state income taxation – in excess of $36,000 in the state where I reside.
Your social security income will be anywhere from 100% income tax free on one end of the spectrum, and up to 85% taxable at the other end of the spectrum. Understanding this important component of your income plan is crucial.
Your taxable investment income (interest, dividends, capital gains and capital gain distributions) may wreak havoc on your income tax planning – and potentially cause part of your social security to become taxable. Portfolio review from a tax planning perspective may be valuable.
And, the income on your tax return determines how much your Medicare Part B premium (which is deducted from your Social Security check) costs. Income in excess of certain thresholds requires increased premiums be made.
As you can see, an income tax plan is an important strategy and component of your retirement income planning.
As I often say, “It’s not what you make, it’s what you keep.”
Want help creating strategies for retirement income tax planning?
© 2017 Jane B. Smith, CFP®