Your retirement years give you more freedom to travel, read more books and explore your hobbies. Giving up a regular paycheck when you retire changes your finances, but one thing that won't change is your need to file taxes. Even though you can't escape income taxes, you might notice changes in your yearly returns. You might also believe myths about taxes for seniors, which could affect your finances. Explore these tax myths to help avoid a costly mistake.
When you're working, you know you need to save for retirement, but you might not think about the tax implications of those contributions. The distributions you receive in retirement can vary when it comes to taxation. In general, if you contributed money to the account on a pre-tax basis, you'll pay taxes on the distributions you receive. This includes most typical workplace retirement plans, such as a 401(k). Pensions are also typically funded pre-tax and are often taxed. If your contributions were after-tax, such as money put into Roth IRAs, you typically won't pay taxes on the distributions.
It seems logical that you'll fall into a lower tax bracket as you get older, but that's not always the case. Your retirement income is typically lower than your salary, and the retirement funds you receive aren't all taxed. However, you might lose other deductions as you age. For instance, if you don't have a mortgage anymore, you lose the deduction for the interest you pay. You might also have multiple streams of taxable income in retirement that keep your income high. Which tax bracket you fall into as you get older depends on your financial situation.
When you retire, you have more freedom to move without a job restricting where you live. You might be tempted to move somewhere without state income taxes. There are nine states without state income taxes:
However, those states are often more expensive to live in. Many of them have higher sales tax and property tax to make up for the lack of state income tax. The overall cost of living might also be higher. Alaska, for example, is typically a more expensive place to live due to being so remote. Plus, moving across the country is an expensive process. Consider all factors of a move before you think about moving somewhere without state income tax.
Paying someone to prepare your taxes can get expensive, but it's not the only way for seniors to get tax help. With the Tax Counseling for the Elderly (TCE) program, you can get free tax help. The program is available for seniors 60 and older from January 1 to April 15, which is the normal tax-filing period. Volunteers can help seniors with tax preparation, including issues that are specific to the older population such as retirement concerns related to taxes.
If your taxes are straightforward and you don't need help, you can file online for free through various tax prep companies. The IRS partners with various platforms to offer free e-filing. You can also file for free with several major tax companies online if you enter the information yourself. However, the free products don't include a review or support from tax professionals.
Your taxes can change as you get older. You might lose some deductions, but you're often still eligible for many tax deductions and credits. If you continue working, maximizing your retirement contributions can lower your taxes. You might also be eligible for catch-up contributions, which increase your contribution amount.
Seniors sometimes start side gigs to make extra money in retirement. They can help you make ends meet by supplementing your retirement income, but they can also complicate your tax situation. You'll need to report the income even if you don't get a W-2. This type of work is often done on an independent contractor basis. You might get a 1099 form if you do work for another company, but that doesn't always happen.
Whether you get tax documentation or not, you still need to report the income on your tax return. You might also have to pay a little more on that income due to self-employment taxes. However, you could also have some additional deductions for things like home office use or vehicle expenses. A tax professional can advise you on the possible deductions.
Some people believe they no longer have to pay taxes once they reach a certain age. However, there isn't an age cutoff for taxes. Instead, it's based on income, with your age as a factor to some degree. For adults aged 65 and older for the 2022 tax filing, you only need to file a return if your gross income was at least $14,700 for single, $21,150 for head of household or $28,700 for married filing jointly beyond your Social Security income. If you're not sure if you need to file taxes, consult with an accountant or tax professional.
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