You’ve toiled away every year of your adult life. Through those years, you’ve dreamed of this day. Finally retirement is here. You’re ready to enter the true golden years of your life, but do you have all the facts?
Even though you may no longer be working and own your home outright, the government is still going to want you to file your tax return and that means paying taxes on your retirement income. This raises a lot of new questions. What do you need to know about these taxes? What are the tax filing requirements? How does the government tax retirement income? These are all very important questions to know going into retirement and to comply with tax laws.
Knowing when you are required to file a tax return doesn’t change with retirement. Failure to do so could result in late filing penalties, interest charges, or even criminal tax evasion charges.
For those who haven’t studied filing requirements, these can be complicated. Just because you are retired doesn’t mean Uncle Sam isn’t going to tax the money from your retirement. There are income levels for retirees that are subject to tax filing, and these income levels vary based on whether you, your spouse or both of you are 65 or older. For specific information as it relates to your situation, contact a tax accountant.
Generally, income is taxable unless it is specifically exempt by law. Taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges and business income.
But don’t start thinking that retirement doesn’t have its benefits. There are certain types of income that are partially or fully exempt from tax under special federal tax provisions.
Social Security Benefits
Whether you owe taxes on your social security benefits depends entirely on your income level and income types. If social security benefits will be your only form of income, you will most likely not need to pay taxes or file a federal income tax return. If you have income in addition to your social security benefits, some of your benefits could be taxable. How much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits. Up to 85% of your benefits can be taxable if either of the following situations applies to you:
- The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if married filing jointly).
- You are married filing separately and lived with your spouse at any time during the taxable year.
Individual Retirement Arrangements (IRAs)
In general, distributions from a traditional IRA are taxable in the year you receive them. Exceptions to the general rule are rollovers, tax-free withdrawals of contributions and the return of nondeductible contributions. After you reach age 591⁄2, you can receive distributions from your traditional IRA without having to pay an additonal10% tax (early withdrawal penalty). Even though you can receive distributions after you reach age 591⁄2, distributions are not required until April 1 of the year following the year in which you reach age 701⁄2. After you reach age 701⁄2, a 50% excise tax applies if the required minimum distributions (RMD) are not withdrawn from your traditional IRA for that year on the amount not distributed. Distributions from a Roth IRA (including investment growth) usually are tax-free provided certain conditions are met.
Pensions and Annuities
If you paid part of the cost of your pension or annuity plan, you can exclude part of each annuity payment from income as a recovery of your cost. This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes.
Supportive services for programs under the Retired Senior Volunteer Program, Foster Grandparent Program, Senior Companion Program and Service Corps of Retired Executives are exempt from income tax.
Sale of Home
You may be able to exclude from income any gain up to $250,000 ($500,000 for a joint return) on the sale of your principal residence. Generally, you can exclude all the gain and you do not need to report the sale on your federal tax return.
For years you have prepared for retirement. With just a little more planning and knowledge, you will truly enjoy your golden years.