Tax planning for retirees may sound simple on the surface. Since they typically have lower incomes and fewer deductions compared with many taxpayers, they don't face such a comprehensive range of tax issues, right? Well, not exactly.
Not Considering Taxability of Social Security
Many people believe that Social Security is not taxable. This is not entirely accurate. In fact, up to 85% can be subject to income tax.
Retirees with minimal income will not pay federal taxes on their benefits. However, if they have additional income, a percentage becomes taxable. Retirees need to calculate their “provisional income” as follows:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Take your adjusted gross income (excluding Social Security)
- Add any tax-free interest received (typically municipal bond interest)
- Add to that total 50% of your Social Security benefit
If the income is below $25,000 for single filers or $32,000 for joint filers, your benefits are all tax-free. If the provisional income is between $25,000 and $34,000 as a single filer or between $32,000 and $44,000 as a joint filer, you are taxed on up to 50% of your Social Security benefits. However, if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you will be taxed on up to 85% of your benefits.
I would recommend that retirees review taxable income annually with their tax adviser to determine if any additional income impacts the taxation of Social Security. This may also put the taxpayer in a higher tax bracket. If careful planning is not completed, the result could be an unpleasant surprise come tax time.
Summary
Tax planning for retirees may not be as simple as you think. Seniors face different circumstances compared with younger taxpayers.
But with careful planning and understanding your tax situation so you can minimize your tax liability and sleep at night. Don’t fall victim to tax strategies that will cost more tax at the end of the day.
-
Stock Market Today: S&P 500, Nasdaq Hit New Highs on Retail Sales RevivalStrong consumer spending and solid earnings for AI chipmaker Taiwan Semiconductor Manufacturing boosted the broad market.
-
Higher Summer Costs: Tariffs Fuel Inflation in JuneTariffs Your summer holiday just got more expensive, and tariffs are partially to blame, economists say.
-
New SALT Cap Deduction: Unlock Massive Tax Savings with Non-Grantor TrustsThe One Big Beautiful Bill Act's increase of the state and local tax (SALT) deduction cap creates an opportunity to use multiple non-grantor trusts to maximize deductions and enhance estate planning.
-
Know Your ABDs? A Beginner's Guide to Medicare BasicsMedicare is an alphabet soup — and the rules can be just as confusing as the terminology. Conquer the system with this beginner's guide to Parts A, B and D.
-
I'm an Investment Adviser: Why Playing Defense Can Win the Investing GameChasing large returns through gold and other alternative investments might be thrilling, but playing defensive 'small ball' with your investments can be a winning formula.
-
Five Big Beautiful Bill Changes and How Wealthy Retirees Can BenefitHere's how wealthy retirees can plan for the changes in the new tax legislation, including what it means for tax rates, the SALT cap, charitable giving, estate taxes and other deductions and credits.
-
Portfolio Manager Busts Five Myths About International InvestingThese common misconceptions lead many investors to overlook international markets, but embracing global diversification can enhance portfolio resilience and unlock long-term growth.
-
I'm a Financial Planner: Here Are Five Smart Moves for DIY InvestorsYou'll go further as a DIY investor with a solid game plan. Here are five tips to help you put together a strategy you can rely on over the years to come.
-
Neglecting Car Maintenance Could Cost You More Than a Repair, Especially in the SummerWorn, underinflated tires and other degraded car parts can fail in extreme heat, causing accidents. If your employer is ignoring needed repairs on company cars, there's something employees can do.
-
'Drivers License': A Wealth Strategist Helps Gen Z Hit the RoadFrom student loan debt to a changing job market, this generation has some potholes to navigate. But with those challenges come opportunities.
