Retirees are eligible for a variety of tax breaks that aren’t available to younger people. However, there are also some new taxes that apply to retirees. Here’s a look at some of the taxes that could crop up in retirement.
Social Security taxes.
Many people have to pay taxes on their Social Security income. If your adjusted gross income, nontaxable interest and half of your Social Security benefit totals more than $25,000 for individuals and $32,000 for couples, half of your Social Security benefit will be taxable. And up to 85 percent of your benefit will be subject to tax if these income sources exceed $34,000 for individuals and $44,000 for couples. Pension payments, traditional 401(k) and IRA withdrawals, interest, dividends and income from a part-time job could all contribute to making your Social Security benefit taxable.
Required minimum distributions.
After years of saving money in tax-deferred 401(k)s and IRAs, you have to begin taking annual withdrawals after age 70 1/2. Income tax will be due on each distribution. A $5,000 withdrawal could cost you $1,200 in taxes if you are in the 24 percent tax bracket. You may be able to delay 401(k) distributions if you are still working after age 70 1/2. You could also donate an IRA required distribution of up to $100,000 directly to a qualifying charity and avoid paying any tax on the transaction. Roth IRAs don’t have distribution requirements in retirement. Roth 401(k) withdrawals are typically required after age 70 1/2, but income tax generally won’t be due on the distribution.
Two distributions in the same year.
Retirees who turn 70 1/2 in 2018 must take their first required minimum distribution by April 1, 2019. The second and all subsequent distributions will be due by December 31. If you delay your first required distribution you might need to take two withdrawals in the same year. A double withdrawal could result in an unusually large tax bill and might even push you into a higher tax bracket. Take a close look at how the timing of your first and second distributions might affect your tax bill.
RELATED: Check out the top cities where retirees are moving:
Top 10 cities where retirees are moving
Top 10 cities where retirees are moving
10. North Las Vegas, Nevada
North Las Vegas is a newcomer to our top 10. One appeal for retirees living in North Las Vegas is how tax-friendly Nevada is for retirees. Social Security income and withdrawals from retirement accounts are not taxed. And if you plan on earning during retirement, the marginal state tax rate in Nevada is 0. Unfortunately, if you are a retiree in North Las Vegas who wins it big on the slot machine there will be some taxes to pay. The city also has great weather thanks to being in a desert.
Net migration: 929
(Mitchell Funk via Getty Images)
9. Cape Coral, Florida
Waterfront Wonderland is once again a popular destination for retirees. Last year Cape Coral ranked second while this year it ranked ninth. In total Cape Coral gained 949 retirees, with 1,926 immigrating and 977 emigrating.
Cape Coral was also the second-biggest beneficiary of Florida’s growth in retirees. What is interesting is that while a large chunk of Arizona retirees went to the Phoenix metro area, retirees coming to Florida tended to be more dispersed. Overall Florida had the largest gain in retirees but had only two cities crack our top 10.
Net migration: 949
(Joe Raedle via Getty Images)
8. Gilbert, Arizona
Gilbert is the final Arizona city to crack our top 10. Like Chandler this city is great for golfers. According to Census Bureau data, there are around 150 golf courses in the area. Retirees can also appreciate how safe Gilbert is. FBI data shows there are only 1,320 property crimes per 100,000 residents.
For the retirees looking to escape the cold, especially those coming from the Northeast, Gilbert is a great option. There are only 16 rainy days per year and the average daily high temperature is 87.
Net migration: 1,002
(jrmetcalf via Getty Images)
7. Peoria, Arizona
Peoria is a large suburb to the north of Phoenix. This city saw an increase of 1,310 retirees, with 1,839 arriving and 529 leaving. Peoria has seen stunning population growth in the recent past. In 1980 the population was only 12,171, while in 2016 it was 164,172.
For seniors who love baseball Peoria may be a good spot to settle. The Peoria sports complex is the spring training home of both the San Diego Padres and the Seattle Mariners.
Net migration: 1,310
(Greg Thomsen via Getty Images)
6. Overland Park, Kansas
Overland Park saw a net increase of 1,330 retirees. Kansas as a state only saw a net increase of 1,357, meaning that for retirees Overland Park was the star destination. Overland Park is a great bargain for retirees. Housing is relatively affordable, costing only $123.50 per square foot, according to Zillow data. In fact, according to our projections Overland Park is one of the most undervalued cities in America.
Net migration: 1,330
(Bloomberg via Getty Images)
5. Chandler, Arizona
Retirees are coming to Chandler in droves. Census Bureau data shows that 1,718 retirees immigrated to Chandler while only 260 emigrated. One reason they may be coming is the golf. Chandler is one of the best cities in the country for golf, thanks to its hot, sunny weather and abundant golf courses. Of course, the low cost of living and tax benefits Arizona provides probably doesn’t hurt.
Net migration: 1,458
(Richard Cummins via Getty Images)
4. Phoenix, Arizona
Phoenix is the second of five Arizona cities in the Phoenix metropolitan statistical area to crack our top 10. The Valley of the Sun, as far as big cities go, is relatively affordable, especially when it comes to paying for housing. According to data from the Census Bureau, the median monthly housing cost is only $993.
Phoenix actually saw some of the most churn when it came to retirees coming and going. Just over 4,100 retirees left the city while over 5,600 arrived. For both those metrics Phoenix ranked first in the top 10. In fact only Chicago and New York had more retirees emigrate than Phoenix.
Net migration: 1,470
(Davel5957 via Getty Images)
3. New Orleans, Louisiana
New Orleans is something of a surprise inclusion in this year’s top 10 since it did not even crack the top 25 in last year’s study. But it’s not too hard to see the appeal. New Orleans is a warm city on the coast with plenty of cultural activities to enjoy. Another factor attracting retirees may be the famous food scene in New Orleans. Overall the Big Easy saw an increase of 1,520 retirees coming into the area.
Net migration: 1,520
(picturist via Getty Images)
2. Jacksonville, Florida
Jacksonville is the largest city in Florida and saw a large influx of retirees moving into the city. Overall 1,817 emigrated while 3,761 immigrated, leaving the city for a net gain of 1,944.
One major reason why retirees love Jacksonville, and Florida in general, is how tax-friendly it is. In past studies we found that Jacksonville is the third-lowest taxed city in the country. It is also a good option for retirees who still want to live in the big city but keep costs low. We estimate that the average Jacksonville retiree would need about $62,470 in annual retirement income to live comfortably. That figure is much lower than other big cities.
Net migration: 1,944
(MichaelWarrenPix via Getty Images)
1. Mesa, Arizona
Mesa is a city in the Phoenix metropolitan area. Last year, Mesa led all cities with a net gain of 2,565 seniors. In this year’s study Mesa also ranked first with just over 3,400 more seniors immigrating to Mesa than emigrating. Mesa is attractive to seniors because of its weather. The sun is almost always out and even in the dead of winter, it never gets that cold. The average low in December, for example, is only 40 degrees.
Net migration: 3,442
(Terryfic3D via Getty Images)
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401(k) and IRA penalties.
There’s a 50 percent penalty if you miss a required distribution from your retirement accounts after age 70 1/2. The penalty is applied in addition to the income tax due on retirement account distributions. A retiree in the 24 percent tax bracket who fails to take a required $10,000 IRA distribution will owe $7,400 in taxes and penalties. You are required to take separate distributions from each 401(k) account you own. However, if you have several IRA accounts, you can total your required distributions and take the withdrawal from any one or several of the accounts.
Loss of IRA eligibility.
Many people deposit money in an IRA shortly before they file their taxes in order to qualify for a tax deduction. But once you turn age 70 1/2, you can no longer defer paying income tax on new contributions to an IRA. Older people who are still working might be eligible to contribute to a tax-deferred 401(k) plan, and after-tax Roth IRAs don’t have age restrictions for older savers.
Pension income from an employer retirement plan is generally taxable. However, if you contributed after-tax dollars to your pension, you won't be required to pay tax on the part of the payment that represents a return on the after-tax amount you paid into the plan.
You will probably need to sell some of your investments to pay for living expenses in retirement. Each sale will generate a short or long-term capital gain or loss that must be reported on your tax return. Long-term capital gains, which apply to assets held longer than a year, are generally taxed at a lower rate than other types of income, but still need to be factored into your retirement expenses. Interest income and dividends will also continue to be taxed as they were before retirement.
Selling your kid's old bicycle is not likely to cause any tax consequences, but when you sell crafts, vintage or specialty items on websites like Etsy, you must report and pay taxes on your net income. You will also likely need to pay self-employment tax on your profits, and in some locations, you may also be responsible for charging and collecting sales tax.
If you use vehicles in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions, buying versus leasing and depreciation of vehicles. Special rules for business vehicles can deliver healthy tax savings.
Congress has passed the largest piece of tax reform legislation in more than three decades. The bill will affect the taxes of most taxpayers, but one key point to keep in mind is that for most people, the bill won't affect your taxes for 2017 (the one you file in 2018).
Every April, many taxpayers wait until the last minute to file their federal income tax returns. Despite this tendency, there are many reasons to file your taxes early. If you will receive a refund, you may want to submit your return as quickly as possible. Additionally, there are benefits to filing early for those taxpayers who have a balance due.