You need all the monetary help you can get when you are retired and don't have the same income coming in when you were working. No one ever wants to overpay in taxes, and you won't as long as you know a few tips to help you get through tax season.
Here are four tips you need to know to make tax time easier:
Take out your RMDs- If you ever opened a 401(k), traditional IRA, or any other retirement plan through your employer, you are required to withdraw a certain amount each year after you turn 70 1/2. If you don't, you will be hit with a 50% tax penalty of the amount you should have taken out. This is called required minimum distribution, or RMDs. Here is a helpful worksheet to help you figure out how much to withdraw every year. If you have an inherited retirement account, the rules are a little different.
Pay taxes as you take distributions. A lot of people don't like to take RMDS because they are subjected to being taxed. Most pension benefits are taxed, as well. When you retire, you still have to pay income tax even when you are not working. You may have been used to your taxes being withheld on every paycheck, so you didn't think about it as much. Now that you are out of the workforce, you need to make sure taxes are being withheld from retirement accounts or making preparations to pay for them at tax time. Most pensions from employers are set up to have taxes withheld, and you can opt to have taxes withheld from other retirement accounts as well.
Your social security is taxed. If you are a senior, you depend on social security to help supplement your income. Social security is taxed, but there are rules. Your social security will be taxed as much as 50% if your income exceeds certain thresholds. A single person with an income of $25,000 and above, or married filing jointly with income above $32,000, your social security benefits could be taxed up to 50%. If you file as single and have $34,000 or married and make $44,000, your social security can be taxed up to 85%!
Make sure to keep track of your medical expenses so you can claim a deduction. Older folks know too well that going to the doctor more is just a fact of life, and sometimes procedures are not covered by Medicare. If you incur unreimbursed medical bills during retirement, make sure you keep track of them. If your medical expenses exceed 7.5% of your adjusted gross income, you can take a deduction for the amount above the threshold. This only helps if you already have other deductions to consider, such as mortgage interest and deductions for state and local taxes. Subtracting medical expenses could help you pay a lot less to the IRS.
It is always good to make sure you understand some of these rules, so in the end, you don't owe too much or have too much taken out.
The financial experts at West Financial Group can help you make the right decisions when it comes to your retirement investments. Contact our office today!