How To Estimate Taxes When You Are Retired

AdminBy AdminNov 3, 20170

Making the transition from earning a steady paycheck to living in retirement can be quite a challenge. One of the biggest challenges is determining how much you owe in taxes when you no longer have an employer to do the withholding.

Every retired person is in a different financial situation, and there is no one tax strategy that is right for everyone. The key is that your tax strategy address the specific types of retirement income you receive, whether that income comes from Social Security, a traditional pension, a 401(k), an IRA or a combination of several different sources.

Move Forward By Looking Back

Move Forward By Looking Back

Review your retirement plan withdrawals for the past tax year and determine how much came from a Roth IRA or Roth 401(k). Withdrawals from Roth IRA accounts are not subject to taxation and do not have to be included in your calculation.

If you are at least age 70 1/2 and hold a traditional IRA, you must take a minimum distribution from that account each year. The amount you must take out is determined by your age, your life expectancy and the balance in the account. You can use an online calculator (See Resources) to determine the amount, or compute it with the help of a tax professional.

Review Your Retirement Income

Review Your Retirement Income

Check the statements you received from your pension plan. The statement you receive detailing your pension income should indicate how much, if any, of that amount is taxable. Include the taxable amount of your pension income when computing your total income for the year.

Keep in mind that your pension may be taxable at the state level, even if it is free of Federal taxes. Contact the state revenue department to determine how much, if any, of your pension payment is taxable.

Social Security Benefits

Social Security Benefits

Gather the statements you received from the Social Security Administration if you are getting benefits from the program. You should receive a SSA-1099 form each year showing the total amount of your Social Security benefits.

To determine if your Social Security benefits are taxable, add half of those benefits to your other income.

For instance, if you had Social Security benefits of $16,000 and other retirement and non-retirement income of $20,000, you would have a total of $28,000. As of 2010, your Social Security benefits are free from taxes if the amount calculated is less than $32,000 for a married couple filing a joint return, or $25,000 for a single taxpayer or someone filing as a qualifying widower or head of household.

Other Income

Other Income

Gather information on all other income, including earnings from wages, interest and dividends. Your tax liability is calculated based on your total income.

Add up all of your sources of income, including required minimum distributions from traditional IRAs and 401(k) plans, Social Security, taxable pension income, as well as non-retirement revenue, such as interest, dividends, capital gains and wages from part-time or full-time employment. This is your total taxable income, and your tax liability is based on that total.

Start Your Return

Start Your Return

Download a copy of the 1040 form from the IRS website, and a copy of the state tax return from the state’s department of revenue. Review the instructions carefully regarding the credits, allowances and deductions you can take against your retirement and other income.

Make those adjustments to get your total taxable income, then refer to the tax table in the instructions for the 1040 form to calculate your tax liability.

Conclusion

Once you have your return started, you can come back to it at any time to add information and change figures as you start to receive your tax documents. By the time you have received your last tax document, you should be ready to file your finished return.

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