Congratulations on your decision to retire this year! I’m sure you have worked hard and deserve to enjoy this new chapter in your life.
I’m so glad you asked this question, because whether you decide to travel, relax, or consult on the side in your retirement, there are a few things you need to consider as you prepare for next tax season:
Sources of Income
First, many retirees are surprised to find that their once tax-free social security income received either by themselves or their spouse may now be taxable when other income streams come into play. Be aware that earning taxable income or receiving taxable retirement distributions may also result in up to 50% to 85% of any social security income you or your spouse receive taxable.
Often times, retirees decide not to totally call it quits from the working world and end up doing work on the side. If this is the case, remember that your income from consulting or other side gigs may also subject a portion of your social security income received by you or your spouse to taxation. Take time to see how multiple streams of income may be taxed. You can use TurboTax TaxCaster to help you figure out how your income may be taxed and whether you may want to hold off on receiving additional income if you can.
There are also considerations if you are diving into consulting or taking up a side gig in the on-demand economy, like driving for Uber or Lyft. If you are not paid as a W-2 employee, you are now self-employed, so you will need to figure out how much taxes you should be taking out of your paycheck, since you will not have taxes withheld. Just remember there will be business expenses to offset your income and lower your taxes like business mileage, start-up costs, or a home office deduction. You can start tracking your mileage, income, expenses, capture your receipts, and estimate your quarterly taxes using QuickBooks Self-Employed, which also easily exports your self-employment information directly to TurboTax Self-Employed.
If you receive retirement distributions and have federal taxes taken out, be sure to file your taxes even if your income is below the IRS income filing threshold, as you may have a refund coming. Every year the IRS reports close to 1 billion dollars in unclaimed refunds due to people not filing because they are under the IRS income threshold.
Retirement Plan Distributions
A long time ago when you were trying to figure out whether to invest in a Roth IRA or a traditional IRA you probably wondered if your decision to invest in a Roth would really pay off. If you went the Roth IRA route, qualified distributions from your Roth will be tax free since you were already taxed up front.
Another retirement benefit to be aware of is Qualified Charitable Distributions from your retirement directly to a charitable organization are also tax free. This can be a huge tax savings for retired taxpayers 70-1/2 or older who are required to receive distributions and have paid off their homes and no longer have big tax deductions like home mortgage interest.
If you are on the road to early retirement, lucky you. Just be aware that when you withdraw from your retirement accounts before you hit age 59-1/2 you will typically get hit with an early withdraw penalty of 10%. If you are close to age 59-1/2 and you can hold off, try and wait before you withdraw from your retirement to avoid the additional penalty.
Have you been providing over half of the support of a loved one? Don’t forget that if you are supporting a relative like a grandchild or your own child you may be able to claim the dependent exemption worth up to $4,050.
Medical expenses can really add up. You can make those doctor’s appointments you have been putting off before the end of this year and reap some tax benefits. If you are 65 or older you can deduct your medical expenses that exceed 7.5% of your adjusted gross income as opposed to 10% if you are under 65.
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions to ensure you get the tax deductions and credits you are eligible for.