A Guide to Taxes in Retirement

According to the Pew Research Center, 50.3% of US adults aged 55 and older are now retired—partly as a result of labor force shifts related to Covid-19. This means a lot of people are facing changes in their tax obligations. So, what do you need to know? 

Of course, the biggest change in retirement is with Social Security. After retirement, you can now begin collecting Social Security and are no longer required to pay Social Security and Medicare payroll taxes. This, however, does not mean retirees are free from paying income tax altogether. Federal income tax is still payable on pensions, traditional IRAs, 401(k)s, annuities and other pre-tax retirement accounts. Additionally, depending on the state you live in, you will also pay taxes on these sources of income, with a few exceptions. Currently, there are nine states that don’t tax pensions, including Illinois! 

Furthermore, if you make additional income on top of your Social Security benefits, you may have to pay taxes on it. This recent article in U.S. News & World Report breaks it down: 

• Individuals with a combined income between $25,000 and $34,000 are taxed on 50% of their Social Security benefit. 
• If your combined income exceeds $34,000, 85% of your Social Security income could be taxable. 

• Married couples face tax on 50% of their Social Security benefit if their combined income is between $32,000 and $44,000. 
• Up to 85% of Social Security income is taxable for married couples with a combined income that exceeds $44,000. 

Understanding this breakdown and strategizing your income streams can significantly affect the taxable portion of your Social Security income. We can help you figure out the best approach to minimizing your income tax obligations. 

Additionally, property taxes continue to apply if you own a home, with some jurisdictions taxing retirees on tangible assets like boats and cars. Naturally, the amount of tax will depend on the value of your property and land. However, if you are a senior citizen, you may qualify for a property tax freeze. You can check your eligibility here. 

Other taxes that retirees need to consider include inheritance taxes, both federal and state. Current federal estate tax only applies on assets over $12,060,000. However, states that have estate taxes do tend to have lower thresholds. Additionally, state inheritance taxes vary by state, with spouses and children of the deceased not taxed in some places. Knowing how best to optimize your estate planning is a key step to decreasing your tax burden, or the burden on your heirs. Our estate planning services can help. 

Finally, like everybody else, retirees still pay sales tax—except in the five states without one, which are: Alaska, Delaware, Montana, New Hampshire, and Oregon. Currently the national sales tax average is 7.09%. To learn where your state lands, check out this interesting article and visual representation of all the states and their respective sales tax rates. Upon retirement, some people consider relocating to another state to take advantage of lower taxes (and better weather!). 

Some people also look to supplementing their income during retirement by renting out an unused accommodation (such as through Airbnb), or delaying collecting on Social Security in order to be able to claim more at a later date. 

Saving as much money—as strategically as possible—while you are still working makes the most sense. However, understanding the various tax implications of retirement and planning accordingly is just as important. 

Whether you are planning for your retirement in the distant future, looking forward to retiring soon, or simply need help assessing and understanding your options, it’s beneficial to seek professional advice on the best strategy for you and your family. At CJBS, we can help evaluate tax planning strategies based on various scenarios, and through our established relationships with financial advisors, help you plan for a prosperous and secure retirement. 

Stay Safe and Healthy,  

The CJBS Team