A client once asked if there is an upper age limit for paying taxes.
Answer: No, there is no upper age limit on paying taxes. If you have enough taxable income you must file and pay even if you are a 100 years old. In fact, it’s likely that someone will still be dealing with your tax concerns after you pass away. Death and taxes – two of life’s certainties.
After retirement, many people are not sure how taxes will work. Nothing in the tax code is simple, but I hope to shed a little light on post-retirement taxes.
Today, I am focusing on Federal taxes. Your state might tax none/some/all of your retirement income.
First, let’s take a look at Form 1040-SR, (SR stands for senior), designed especially for taxpayers over age 65. This form was added as an optional alternative in 2019.
The main difference is larger print! It has four pages compared to two for the regular 1040. On the last page there’s is a chart to determine your standard deduction.
Note: The schedules and instructions are exactly the same for the 1040-SR as the regular 1040. There’s no special tax break just for using the form. But it is easier on the eyes. Especially if you do your taxes by hand. But please, don’t do your taxes by hand.
Next I’ll review four common sources of taxable income for retirees: Pensions, IRA/401k Distributions, Social Security, and investment income.
Pensions
When you start your pension you’ll be asked if you want tax withheld. The tax withholding form for pensions is IRS Form W-4P. The payer of the pension may have their own substitute Form W-4P. You can always submit a new form later if you need more or less tax withheld.
At tax time: You will receive a Form 1099-R reporting the taxable amount of the pension and how much if any tax was withheld. This form is similar to the W-2 you received during your working years.
IRA/401k Distributions
Distributions from traditional IRAs and 401k/403b plans are almost always taxable. (Note: Distributions from Roth IRAs/401k plans are typically not taxable).
401k/403b plan distributions are usually subject to mandatory 20% Federal tax withholding. You can have more tax withheld if needed.
With IRA distributions, the IRA custodian will ask you how much tax if any you want withheld. You can usually choose a percentage or a dollar amount.
At tax time: you will receive a Form 1099-R reporting the taxable amount of the distribution and how much if any tax was withheld. This form is similar to the W-2 you received during your working years.
Social Security
The taxability of Social Security benefits depends on your filing status and the amount of other income you have besides Social Security.
You can request optional Federal tax withholding from your Social Security payment when you first apply for benefits.
However, the options aren’t very flexible. You can choose to have 7%, 10%, 12%, or 22% withheld from each payment; no other percentages are allowed.
If you want to change withholding after you’ve already started receiving benefits, you need to fill in a Form W-4V and return it to your local Social Security office in person or by mail.
A client once told me that a Social Security employee insisted she must have Federal tax withheld from her benefit because her husband was having tax withheld from his. This is false.
At tax time: You will receive a Form 1099-SSA from the Social Security Administration. It shows the total amount of benefits received and how much tax if any was withheld for the year. It also shows the amount of Medicare premiums deducted from your benefit. The Medicare premiums may be deductible as a medical expense.
Investment Income
If you hold investments outside of an IRA/401k plan you will likely have dividends, interest, or capital gains income that may be taxable.
At tax time: These income items are reported on a 1099-DIV, 1099-INT, or 1099-B form (or one form combining all three of these).
Some taxpayers make quarterly estimated tax payments to cover the tax on these items. That works, but it’s easy to forget to make the payment. It requires writing checks. You have to tell your tax preparer the amounts you paid. She gets cranky if your numbers don’t match hers. It’s a hassle.
These payments can be made online, but many people are not comfortable doing so.
However, most retirees don’t have to make quarterly estimates. You have the option adjusting the withholding on your other income sources to cover the taxes for your investment income. This may be a way to simplify your life if you are currently making estimated payments.
Taxes at all ages can be confusing! The laws change frequently. Often, they don’t make a lot of sense.
One useful tool for modeling your tax return is the AARP tax calculator.
The good news is there are often tax planning opportunities in retirement, but that will have to be another newsletter.
