Retirement Tax Information You Need to Know
One of the biggest (and happiest) surprises many retirees enjoy is how little they are taxed once they retire.
Note: I am not a CPA. I am not licensed to give tax advice, so I am just going to give you some good tax facts.
So let’s take a look at what taxes you can expect to pay during your golden years.
- State income tax. If you live in Florida, there is no state income tax.
- Social security payroll tax. You do not pay into the social security system once you stop working. That saves you 6.2%.
- Medicare payroll tax. You do not pay taxes into Medicare once you stop working. That saves you 1.45%.
- Federal income tax. This is the main tax you will be paying once retired. I have more good news! You may be in a lower tax rate than you expect.
- How about this? Massachusetts luxury tax kicks in when you spend more than $175 on clothes or shoes. It’s an additional 6.25% above and beyond the sales tax.
- New York charges an eight-cent tax on bagels.
- New York charges a 4% tax on car purchases in addition to any city or county taxes.
- California’s state income tax is 13.3%. This means some people pay a total of 65% of their income in taxes.
Generically what I’ve found is:
If you are married and bring in less than $5000/mo you will pay NO income tax.
If you are single and bring in less than $3000/mo you will pay NO income tax.
Social Security is only taxed if you reach certain income levels.
This is the formula:
If half of your Social Security payments + work income + IRA withdrawals + pensions equals less than $32,000 you pay no taxes on your Social Security.
Remember too that married couples now get a $24,000 standard deduction.
Let’s look at a scenario.
Bob and Lisa Wiggins are in their 60’s and retired. Each month they receive income from:
Bob’s social security- $1500/mo
Lisa’s social security- $2000/mo
Mary’s teacher’s pension- $1000/mo
Withdrawals from Bob’s IRA- $500/mo
This equals $5000/mo. When they file their tax return they will owe no income tax, no state income tax. Nothing. That is $5000 cash in their pocket. That is amazing news!
What is happening here? A big part is due to the fact that Social Security is not being taxed. The standard deduction is also a game-changer.
These concepts are incredibly important to understand. Why? Many people with whom I speak are terrified of living on less income once retired than while working.
Let’s say Bob and Lisa were making $90,000 combined while working. That could be a big problem, right? $7500 a month was coming into the household while working, but only $5000/mo once retired.
But at work, by the time they paid social security tax, medicare tax, federal income tax, and contributed money into their 401k’s they were bringing home around…$5000/mo.
So really their net income is the same in both scenarios. Also great news!
What happens if you make more than $5000/mo? Taxes can still be pretty manageable.
Take a look at the table to get a general idea of what you have to pay in taxes. The figures are monthly tax liabilities.
For example, if you are married and make around $8000/mo in income you will have to pay around $800/mo in taxes.
$0-5k 0-3k $0
5k-6k $150 3k-4k $150
6k-7k $400 4k-5k $350
7k-8k $650 5k-6k $550
8k-9k $850 6k-7k $750
9k-10k $1,075 7k-8k $1,025
10k-11k $1,300 8k-9k $1,275
11k-12k $1,550 9k-10k $1,525
12k-13k $1,825 10k-11k $1,775
13k-14k $2,075 11k-12k $2,025
14k-15k $2,325 12k-13k $2,275
15k-16k $2,575 13k-14k $2,550
16k-17k $2,850 14k-15k $2,850
17k-18k $3,150 15k-16k $3,150