Beware of Hidden Taxes in Retirement

Your taxes in retirement may be a lot more complicated than taxes while you’re working. Social Security checks may or may not be taxed, depending on your income. You’ll pay…

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Your taxes in retirement may be a lot more complicated than taxes while you’re working.

Social Security checks may or may not be taxed, depending on your income. You’ll pay federal income taxes on most retirement plan withdrawals, but additional state taxes depend on where you live. Tax rates on investments can vary as well.

Here’s what to expect when you hit retirement age:

Social Security taxes depend on ‘combined income’

Whether and how much of your Social Security benefit is taxed will be determined by “combined income.” That’s your adjusted gross income, plus any non-taxable interest, plus half your Social Security benefit. If your combined income is below $25,000 and you’re single, your benefit won’t be taxed. If your combined income is between $25,000 and $34,000, you may pay tax on up to half of your benefits. Over $34,000, up to 85% of your benefits may be taxable. For joint filers, the 50% range is $32,000 to $44,000, and the 85% range is over $44,000. The tax calculations are fairly complex so you’ll want to use software, or a tax pro, to figure yours.

Note that you won’t lose half or more of your benefit to taxes. Instead, up to 85% could be subject to income taxes at your ordinary income tax rates. (There are currently seven tax brackets, ranging from 10% to 37%.)

State taxes could take another bite

In 13 states, you also could owe state income tax. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia all tax Social Security benefits to some extent.

Seven states don’t tax income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax only dividends and interest.

Elsewhere retirement income may be exempt, partly exempt, offset by a credit or fully taxable. Sales, property and use taxes vary hugely as well. (Use taxes are imposed by counties and municipalities to fund public services such as libraries or fire protection.)

Anyone thinking of moving to a new state in retirement should thoroughly research the state’s tax laws, or ask a tax pro for help, says Melissa Labant, director for tax policy and advocacy for the American Institute of CPAs.

 

 

Information Courtesy of  Author: Liz Weston Published: 3:22 PM EDT June 14, 2018 Updated: 3:22 PM EDT June 14, 2018

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