If you have a comprehensive estate plan you will likely be able to count on receiving some type of income during retirement even after you have stopped working to earn money. However, just because you have stopped working it does not mean you will no longer have to worry about paying taxes. The income you receive from investments or retirement plan accounts will still incur tax liabilities.
Social Security
Most people will be able to receive payments from Social Security when they reach retirement age. If Social Security is your only source of income during retirement you will not be charged taxes on this income. However, if you have other sources of income you will incur tax liability on Social Security payments. How much these payments are taxed will depend on your overall income level.
Qualified retirement plans
Retirement plans which the Internal Revenue Service (IRS) deems qualified are those which allow your investments to accrue tax-deferred. However, you may end up paying taxes when you eventually receive distributions from a qualified retirement plan account. Distributions from a traditional Investment Retirement Account (IRA) may incur tax liability depending on your annual income at that time. You may also have to pay taxes on 401(k) distributions as well. Distributions from plans like these which are funded by tax-deferred dollars are considered ordinary income for tax purposes.
Earned income
Those who continue to work to earn some extra money in their golden years will have to pay taxes on this earned income. Although distributions from retirement accounts, mentioned earlier, do also count as income for tax purposes, earned income has some additional tax liabilities to worry about. Earned income, along with paying federal income tax, will require you to pay Social Security and Medicare taxes as well.
On the other hand, you should note that if your total income, which includes earned income, unearned income, and Social Security benefits, is lower than the standard deduction you will not owe income taxes at the federal level.
Standard deduction at retirement age
The standard deduction is a specific dollar amount you are allowed to deduct from your total taxable income. Those who have reached retirement age are able to take advantage of a higher standard deduction when filing their taxes.
Usually, for those who have yet to reach retirement age, the standard deduction is $25,900 for married couples filing jointly for the tax year 2022. For single filers, the standard deduction for 2022 is $12,950. Those who are married but filing separately are provided a standard deduction of $12,400. Head of the household has a standard deduction of $18,650.
Once you reach the age of 65 years you will be provided an additional standard deduction amount which varies depending on your filing status. For single filers of retirement age, the additional standard deduction amount is $1,750 which makes total standard deduction $14,700 for the tax year 2022. The senior bonus standard deduction for married joint filers is $1,400 per spouse. For married individuals filing separately the senior bonus is $1,400 while a head of the household filer is allowed an additional $1,750 senior bonus.
Tax planning for retirement
It is never too soon to start making plans for retirement. Having a holistic financial plan can help ensure you enjoy your golden years with the quality of life you deserve. Integrating tax issues is a key part of having an effective and comprehensive retirement plan. You should discuss any tax or legal matters with the appropriate professional.