MINNEAPOLIS — When you retire, the first thing many have on the mind is spending time with family, taking on home improvements that you may have put off for awhile, or perhaps traveling. It's likely not doing your taxes, and all the changes that come with it.
Chris Orestis, the president of Retirement Genius, a Portland, Maine-based organization that provides resources and information for a successful retirement, says it's a common misconception for retirees to think they don't have to file taxes.
"You’re still going to be paying taxes," Orestis said. "It still costs you money in different ways to be living in retirement, and there’s a lot of unexpected impacts that that will have on your real income to work with."
Orestis says there are a few things retirees need to know about the differences between filing during your younger and older years, so we'll break it down by category.
Social Security Benefits
Orestis said there area few things to keep in mind if you are filing while receiving Social Security benefits.
"Social Security [benefits] can be a tax trap because if you’re making over a certain amount of income while collecting Social Security, you’ll be charged taxes against your Social Security benefit," he said. "People don’t realize that."
Orestis said if you make more than $19,500, you can be taxed between 50-85% against your benefits, depending on how much more than that amount you make.
"For seniors who really aren’t making much income, maybe any at all, you don’t have to worry about it," he said.
Still, he encourages people to make an income if they like.
"Don’t let that scare you off from making an income, just be informed and aware that there are tax consequences that you need to be aware of."
When it comes to older adults who are on Medicare, Orestis says there's an opportunity to save when filing.
"If you’re self-employed and not eligible to get any kind of group coverage let’s say from a spouse that’s still working, then what you’re paying in premiums can be deducted from your taxes," he said.
Tax advantages for those 65+ with investment incomes
Adults 65 and older have the advantage of a lower capital gain tax, which is a tax on the profit on the sale of a non-inventory asset, such as the sale of stocks, bonds, or real estate.
"Typicially, people at the age of 65 they start to retire, their income will decrease, and that will have an impact on your capital gain rate," Orestis said. "So the upper end of capital gain is 20%. But based on your income as it lowers, your capital gain rate on things like investment income and selling assets can drop from 20% to 15% to even 0% based on your income."
Orestis says retirement accounts can be very beneficial, but you need to know the right information to not fall into a trap.
"In the early days when you’re working and putting money away for retirement, you should be taking full advantage of 401K plans and IRAs," Orestis said. "A 401K plan is pre-taxed money, so every dollar you put into a 401K plan that’s coming out of your paycheck, is coming out before it is taxed so you’re getting your full, gross dollars into that account."
However, if you take money out too soon (before the age of 59-and-a-half), he says you'll be hit with a 10% tax penalty, and you'll also pay income tax on what you've taken out of the account.
"Also, if you wait too long to take money out of the account, when you hit the age of 72, you have to start taking what’s called a required minimum distribution," he said. "That means every year, you have to take a certain amount out of the accounts, you can’t just leave them sitting there."
Finding the right financial consultant
All in all, Orestis said whether you're a senior filing taxes yourself, or you're helping your older parents file, it's best to get professional assistance, even if it means spending a couple hundred dollars.
"It’s really a smart move to work with accountants, particularly those who understand and can specialize in senior planning around issues like long-term care, entitlements, drawing on their investments, drawing down on their income, now that they’re at that next stage of life, you want to get things right."