Retirement Tax Information You Need to Know

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.

  1. State income tax. If you live in Florida, there is no state income tax.
  2. Social security payroll tax. You do not pay into the social security system once you stop working.  That saves you 6.2%.
  3. Medicare payroll tax. You do not pay taxes into Medicare once you stop working.  That saves you 1.45%.
  4. 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.
  5. 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.
  6. New York charges an eight-cent tax on bagels.
  7. New York charges a 4% tax on car purchases in addition to any city or county taxes.
  8. 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.

 

Why?

 

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.

 

Married              Single

$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

 

Be Blessed,

 

Dave

 

 

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