You paid taxes throughout your entire working life, whether you were worked a full-time job with a company or you were self-employed. Now that you’re retired, the kinds of taxes you’ll be paying are going to change.
If you’re getting ready to retire, here are the taxes you may have to pay.
Income Taxes
When you retire, the good news is you will no longer have to pay Social Security and Medicare payroll taxes. The bad news is that you will still have to pay income taxes on the state and federal levels, unless you live in one of the nine states without income tax. Then, you’d only have to pay the federal income tax, which ranges from 10% to 37% depending on how much you make. You will need to pay taxes on things like your pension, traditional IRA, 401(k), annuity, and other types of pre-tax retirement accounts you opened.
Social Security Taxes
You could have to pay taxes on your Social Security benefits if you make additional income aside from your benefits payments. The amount you will be taxed depends on your combined income. It includes 50% of your Social Security benefits for the year, along with your adjusted gross income from salaries, wages, dividends, and pensions, and tax-exempt interest income, such as the money you make from municipal bonds.
If your individual return states that your combined income is $0 to $24,999 per year, you won’t pay any taxes on your Social Security benefits. If it’s $25,000 to $34,000, that will be treated as taxable income and you’ll pay up to 50% in taxes on it. If it’s more than $34,000, 85% of that will be taxable.
If you’re married and you file a joint return, you won’t pay taxes if your combined income is $0 to $31,999. Up to 50% is taxable if it’s $32,000 to $44,000, and up to 85% is taxable if it’s more than $44,000.
Sales Tax
Unless you live in one of the four states without sales tax, you’ll still be paying it. The average sales tax rate in the U.S. is 7.12%, with Alaska having the lowest (1.76%), and Tennessee having the highest (9.55%).
Property Taxes
If you own a home, you’re going to need to pay property taxes on it. You’ll be taxed based on how much your property and land are worth. In some places, you might have to pay taxes on tangible personal property like boats and cars as well. The average property tax rate nationwide is 1.1% of the average home value.
Inheritance and Estate Tax
An estate tax is a tax on someone’s assets after they die. There is a federal estate tax, but it usually only applies when assets are worth more than $11.7 million. Some states also have estate taxes; the thresholds are lower than the federal ones.
An inheritance tax is a state tax on assets you inherit from someone who passed away. States have different rules on inheritance taxes. Depending on where you live, if you are the spouse or child of the deceased, the inheritance you receive will not be taxable.
How to Make the Most Out of Retirement
You may be worried about how you’re going to make your money last once you retire. Fortunately, there are a number of steps you can take with your retirement plan to protect your wallet and ensure that you’ll have what you need to live a comfortable life.
Along with contributing to your retirement fund while you’re still working, you may want to consider moving somewhere cheaper. Florida is the best place for retirees to go not only because the weather is beautiful and the housing is affordable, but also because it has low taxes and no state income tax. When looking into other options, see how much housing, food, transportation, utilities, and other necessities cost in order to make your decision.
Whether or not you move, you could also look into earning passive retirement income. Perhaps you have a guesthouse you could rent out, or you could sell items you no longer use online or at an estate sale.
It’s also a good idea to delay collecting Social Security. You may not need them when you’re 66, but you will definitely need them when you’re in your 80s, 90s, and beyond.
You could also talk to a financial advisor who will be able to give you specific tips based on your situation. They’ll let you know about safe investments to make and how to budget your money properly.
Filing Taxes in Retirement
Filing taxes is still a must in retirement, but thankfully, it’s simple with TaxAct. You can file on your own or with the help of one of our tax experts or CPAs. They can answer all of your questions and make sure that you’re filing the right way.
For more information, you can visit our website and learn about all the tax filing plans we have to offer.