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4 Tax Tips for Retirees

By Christy Bieber - Mar 16, 2019 at 6:36AM

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Make sure you understand these key tax rules as you embark on your golden years.

Paying taxes as a retiree can be a major burden, and you wouldn't want to pay more than the minimum required.

Whether you're newly retired or have been out of the workforce for a while, it's imperative that you understand the IRS -- and state tax -- rules that apply to you so you can make informed choices to keep your tax bill as low as possible.

Here are four tax tips to help you make sense of your tax obligations as a retiree. 

Older couple looking at financial paperwork with an advisor.

Image source: Getty Images.

1. Don't forget to take your RMDs

If you have a 401(k), traditional IRA, or certain other employer-sponsored retirement plans, you're required to begin making annual withdrawals from your retirement accounts once you hit the age of 70 1/2. These are called required minimum distributions, or RMDs. If you've just turned 70 1/2, you have until April 1 of the next calendar year to take your RMDs, but after that first year, you'll need to take your money out by the end of the calendar year. 

The IRS provides tables that detail the amount of your required minimum distribution based on your age and other key factors. There's also a helpful worksheet available to calculate how much you must withdraw each year. You also have to take RMDs from inherited retirement accounts, but the rules for withdrawals differ

If you forget to take a required minimum distribution -- or don't realize one is compulsory -- you'll be hit with a huge tax penalty equal to 50% of the amount you should've taken out. You definitely don't want this to happen. The good news is, if you recently turned 70 1/2 and you didn't know this rule, there's still time to take your RMDs for the 2018 tax year -- you have until April 1, so act quickly. 

2. Remember to pay taxes as you take distributions 

Many people don't like to take RMDs because distributions from retirement accounts are subject to tax. You are taxed on most pension benefits as well. 

Unfortunately, when you owe taxes on retirement income, things can get complicated. That's because the U.S. tax system is a pay-as-you-go system so you can't just wait until the end of the year to comply with your tax obligations -- you have to pay as money comes in. 

When you were working, chances are good your employer took care of your ongoing tax obligations by withholding money from each paycheck and sending it to the IRS. But once you leave the workforce, you need to make sure you're meeting the requirements for paying taxes along the way.

If you get a pension check from your employer, it's likely you'll still be subject to withholding so won't have to worry because money will be taken from that check and sent to the IRS. You can also opt to have money withheld for taxes when you take distributions from retirement accounts -- and sometimes financial institutions that manage IRAs or trustees that manage 401(k)s do this automatically. 

However, seniors who don't have taxes withheld from their 401(k) or IRA distributions may need to pay quarterly estimated taxes to avoid a penalty. So, when you take distributions, make sure you understand what, if anything, is being withheld --- and submit quarterly payments if nothing is being taken out of your money to give the IRS its cut. 

3. Know how your Social Security benefits are taxed

As a senior, there's a good chance a lot of your income comes from Social Security. So, it's important to understand the rules for when and how these benefits are taxed. 

Social Security benefits are taxed only if your income exceeds a certain threshold. Income for these purposes is defined as half your Social Security benefits, plus all taxable income and some nontaxable income including municipal bond interest. 

If you're a single person with income above $25,000 or married filing jointly with income above $32,000, up to 50% of your Social Security benefits could be taxed. If you file as single and have at least $34,000 in income or are married and make $44,000 in income, up to 85% of your benefits could be taxed

You also need to know your state's rules on taxing Social Security benefits if you live in one of the 13 states that do.  

Understanding these rules is important when you're trying to decide how much money to withdraw from retirement accounts, as well as when you calculate how much you'll owe in taxes and figure out whether quarterly estimated tax payments need to be made. 

4. Keep track of your medical expenses in case you can claim a deduction 

Finally, many seniors face big medical expenses -- some of which aren't covered by Medicare.

If you incur unreimbursed medical expenses during retirement, it's important to keep track of the total. Once your medical expenditures exceed 7.5% of your adjusted gross income (for tax year 2018) or 10% of adjusted gross income (for tax year 2019), you can take a deduction for the amount above that threshold. 

You will have to itemize to claim this deduction, so for many seniors, it won't make sense because the standard deduction will be the larger of the two. But if you have other hefty deductions to take, including mortgage interest or a deduction for state and local taxes, subtracting medical expenses could further reduce your taxable income so you don't have to pay as much to the IRS. 

Make sure you know the tax rules that apply to retirees

Understanding the tax rules applicable to retirees is very important to make sure you don't end up owing penalties or paying more in taxes than you need to. Hopefully, these tips can help you for tax year 2018 and beyond so you can keep more of your hard-earned income to enjoy your senior years. 

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