Nobody wants to pay taxes, least of all retirees who often don't have a lot of money to begin with. Fortunately, there are steps you can take as a retiree to minimize your tax burden. Here are a few tips to help you get started.
1. Prepare to be taxed on your savings withdrawals
Unless you have a Roth IRA, the money you withdraw from your retirement savings is subject to ordinary income tax. So if your effective tax rate is 15% and you withdraw $30,000 a year from your 401(k), prepare to fork over about $4,500 to the IRS. The same holds true for pension plan withdrawals, which are also taxed as ordinary income. Furthermore, if you have an annuity, a portion of your distributions may be taxable as well. Knowing what to expect tax-wise can help you prepare and better manage your money, so read up on the rules for taxes and withdrawals.
2. Maximize medical deductions
Medical expenses tend to eat up a huge chunk of retirees' income. The good news is that many of these expenses are also tax-deductible. Some examples include Medicare premiums, in-office copays, and prescription drugs.
As long as you itemize, you can claim a deduction for medical expenses -- but only if they reach a certain threshold. In fact, for a long time, you could claim a medical expense deduction if your total out-of-pocket costs reached 7.5% of your adjusted gross income (AGI), but that limit has since been increased to 10%. Fortunately, those 65 and older are exempt from the 10% threshold increase until 2017. So if you're currently 65 or older, you can still take advantage of that lower threshold for the 2016 tax year.
3. Choose tax-free investments
By the time you reach retirement, you should have ideally shifted much of your portfolio away from stocks and into bonds, so why not buy bonds that offer a tax advantage? Municipal bonds provide a great opportunity to generate a steady stream of interest income in retirement, but better yet, the interest you earn is always exempt at the federal tax level. And if you buy municipal bonds that are issued by your home state, you won't pay any state or local taxes, either.
4. Take advantage of mortgage interest
In an ideal world, you'd have paid off your mortgage before entering retirement. But that doesn't always happen, so if you're still making a monthly mortgage payment, you might as well use it to your advantage tax-wise by deducting your mortgage interest. Even if you're toward the end of your mortgage, at which point the majority of your money should be going toward your principal, be sure to take whatever interest deduction you're eligible for.
5. Be charitable
As a retiree, you may not have a lot of spare cash to give away to charity. If you can't afford to donate much money, try donating goods instead. As long as you get an itemized receipt for the items you donate, you can claim a deduction on your taxes. Many retirees wind up downsizing at some point because they no longer need as much spare room or can't afford to maintain larger homes. If you're in the process of downsizing, donating the things you no longer need can save you money on taxes and make for a less burdensome move.
As a retiree on a fixed income, it's natural to want to hang onto every penny you get your hands on, and the idea of forking over even a small amount of your income to taxes might seem like a major blow. But if you prepare for what's ahead and make a few strategic decisions, you could lower your taxes and keep more of that money for yourself.
Also check out the biggest tax havens across the globe:
The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
To minimize tax liability from your investment portfolio in retirement, consider tax-efficient investment strategies such as holding investments long-term to qualify for lower capital gains rates, consider converting your retirement savings into tax-advantaged accounts like Roth IRAs, optimize asset location to place ...
At what age is Social Security no longer taxed? ›
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
How much money can a 70 year old make without paying taxes? ›
For retirees 65 and older, here's when you can stop filing taxes: Single retirees who earn less than $14,250. Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older. Married retirees filing separately who earn less than ...
How to avoid federal tax on retirement income? ›
5 Ways to Reduce Tax Liability in Retirement
- Remember to Withdraw Your Money From Your Retirement Accounts. ...
- Understand Your Tax Bracket. ...
- Make Withdrawals Before You Need To. ...
- Invest in Tax-Free Bonds. ...
- Invest for the Long-Term, Not the Short-term. ...
- Move to a Tax-Friendly State.
If during retirement you only have income from Social Security benefits, then you will not include those benefits in your gross income. In this case, your gross income will equal zero, and you won't have to file a federal income tax return.
How do I get the $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
Can I get a tax refund if my only income is Social Security? ›
You would not be required to file a tax return. But you might want to file a return, because even though you are not required to pay taxes on your Social Security, you may be able to get a refund of any money withheld from your paycheck for taxes.
At what age do seniors stop paying federal taxes? ›
Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a return for tax year 2023 (which is due in 2024) if your gross income is $15,700 or higher. If you're married filing jointly and both 65 or older, that amount is $30,700.
Do people over 75 have to file income tax? ›
The IRS typically requires you to file a tax return when your gross income exceeds the Standard Deduction for your filing status. These filing rules still apply to senior citizens who are living on Social Security benefits.
What is the new standard deduction for seniors over 65? ›
For the 2022 tax year, seniors filing single or married filing separately get a standard deduction of $14,700. For those who are married and filing jointly, the standard deduction for 65 and older is $25,900.
Once you turn 50, and especially after age 65, you can qualify for extra tax breaks. Older people get a bigger standard deduction, and they can earn more before they have to file a tax return at all. Workers over 50 can also defer or avoid taxes on more money using retirement and health savings accounts.
What are the tax rules for retirees? ›
Retirement tax rates by income source
Roth IRA or Roth 401(k) qualified distributions are tax-free. Social Security income is taxed at your ordinary income rate up to 85% of your benefits; the rest is tax-free.
Do pensions count as earned income? ›
Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits. For tax years after 2003, members of the military who receive excludable combat zone compensation may elect to include it in earned income.
How much can a fully retired person earn without paying taxes? ›
How Is Social Security Taxed in Retirement?
| Combined Income | Taxable Portion of Social Security |
|---|
| $0 to $24,999 | No tax |
| $25,000 to $34,000 | Up to 50% of SS may be taxable |
| More than $34,000 | Up to 85% of SS may be taxable |
| Married, Joint Return | |
8 more rowsYou must pay taxes on up to 85% of your Social Security benefits if you file a: Federal tax return as an “individual” and your “combined income” exceeds $25,000. Joint return, and you and your spouse have “combined income” of more than $32,000.
How do I get full tax-free retirement income? ›
5 Ways to Get Tax-Free Retirement Income
- Roth IRA or Roth 401(k) – Roth IRAs and Roth 401(k)s have tax-free qualified withdrawals at retirement since taxes are paid on contributions.
- Municipal Bonds Income – A fixed-income investment that generates interest payments that are typically exempt from federal taxes.
After their income hits a certain level, their Social Security withholding stops for the year. Officially known as the wage base limit, the threshold changes every year. As mentioned above, the 2023 limit for paying FICA taxes is $160,200, and the 2024 limit for paying FICA taxes is $168,600.
At what age can you earn unlimited income without affecting Social Security? ›
later, then your full retirement age for retirement insurance benefits is 67. If you work, and are at full retirement age or older, you may keep all of your benefits, no matter how much you earn.
What age are you to be from tax exempt with Social Security? ›
Key Takeaways. Social Security benefits may or may not be taxed after 62, depending on other income earned. Those only receiving Social Security benefits commonly do not pay federal income taxes. In 2024, eleven states tax Social Security benefits in some manner.
