If you're retiring this year, congratulations. Life will get better if you've planned well, but remember that taxes can play a huge role in your financial future during retirement.
Once you are no longer working full time and depending mostly on Social Security and retirement savings accounts, your tax situation can change. Dara Luber, senior manager of retirement at TD Ameritrade, says retirees – and those soon to be retired – need to pay closer attention to aspects of the tax law that can help or hurt.
“You need to be aware of how Obamacare and tax penalties related to the Affordable Care Act might have tax implications,” Luber told ConsumerAffairs. “You need to know whether tax brackets are changing.”
You also need to be aware of advantages that are available to older consumers, like changes to catch-up contributions. Ignoring legal changes could mean missing out on tax-favorable, last minute catch-ups to a retirement fund.
Changes at 65
When you turn 65, the way you file your taxes may change. You may be eligible for certain credits and deductions, and will be able to take a higher standard deduction, which may be more advantageous than claiming itemized deductions. Tax planning may change, especially if you are withdrawing funds from a tax-deferred retirement account.
“You may want to take into consideration things like your required minimum distribution if you are 70 and a half, you may want to take into consideration some state tax benefits in terms of your Social Security, and how that's taxed,” Luber said.
At the same time, certain credits or deductions you've enjoyed in the past may no longer apply. You may need to consider paying estimated quarterly taxes once you hit retirement.
Luber says there is no cookie cutter retirement plan, but you can take into account some fairly general assumptions by asking yourself some questions.
“Do you think taxes are going up? What do you think will happen with Social Security and Medicare? The answers can affect your tax planning,” she said.
Fortunately, there are many resources to help retirees deal with tax issues. The Internal Revenue Service (IRS) provides an extensive resource for retirement issues. TD Ameritrade also maintains a 2016 Tax Resource Center that may prove helpful.
Finally, Luber says it is important to consult with a tax professional as you transition into retirement. If you have been doing your own taxes each year, it might be wise to obtain the services of an enrolled agent—a tax professional who is licensed by the IRS, at least for the first year.
If your retirement involves a move, you may want to check with your new state's CPA society, the Accreditation Council for Accountancy and Taxation, or the National Association of Enrolled Agents.
The important thing is to make sure you are aware of all the benefits and responsibilities that come to a retired taxpayer. Retirement will likely change many of the ways you live your life, including the way you manage your finances and taxes.
“It's really a balancing act, trying to figure out how you limit your taxes and keep more in savings and still have enough to live on in retirement,” Luber said.