“Gone are the days when retirees in America were excluded from tax stress and received breaks in tax returns”, says Bob Carlson, editor of Retirement Watch, “now the government knows that money lies with the elderly and that is where they tap.” Many of us are left wondering if they will have to pay taxes on retirement income and in this post we will discuss this topic. The Government requires funds to operate and for them, age is not a criterion for stepping back. They are well aware that the retired Americans are the wealthiest and thus have maneuvered systemic taxation policies accordingly. It is only the paycheck that exits with retirement but all other checks including pension, IRA distributions and social security benefits keep rolling in thus becoming eligible for taxation.
Depending on where the retirement income comes from and how much is it that a retiree receives, the retired citizens of the US keep paying taxes even after retirement. It more or less keeps working just as it does before retirement.
Types of Taxable Retirement Incomes
The retirement incomes on which the retiree is taxed have different rules to it but the six most common types of taxable retirement income are:
Withdrawing from retirement policies:
All withdrawals made from 401(k), 403(b), 457, SEP, SIMPLE, IRA (Individual Retirement Account) are taxable. But how much tax is paid depends on the income from the particular year after taking into account the deductions made by the retiree. If the deductions overshadow the income, then the tax paid is nil for the particular year.
Another exception is the ROTH IRA, which falls under the non-taxable criterion.
Receiving Pension Income:
Generally, income from all pension schemes is taxable. How much the pension would be deducted as the tax is ascertained under a form 1099, at the beginning of the year.
Though pension received from military or under a disability account is exempted partially or completely from tax.
Income from Annuity:
If the income from the annuity is included in the IRA then the tax would have to be paid according to the rule mentioned in the IRA. If annuity withdrawals are from an immediate annuity or fixed or variable annuity then the taxable amount would be deduced accordingly.
Income from Investments:
Any income from dividends, interest or capital gain is taxable even after retirement. How much tax is to be paid is yet again determined on the income received.
Income from Social Security Benefits:
Income from social security is non-taxable if it is the only source of income after retirement. In case of social security benefit not being the only source of income, the retiree is supposed to pay taxes up to 85% of his social security benefit, depending on how high the monthly pension received by the retiree is.
Here is more information on Retirement income.
Income from sale of fixed asset i.e. Home:
If the home is more than 2 years old then you will only be required to pay taxes if the gains from the sale of your house are more than $ 250,000 if single and $500,000 if holding a marital status.
Thus, retired US citizens have to pay taxes even on their retirement money and it is vital that they structure their retirement income in such a manner that when they reach retirement they are likely to pay fewer taxes.
American natives are taxed on their retirement income and thus they should with the help of a skilled tax advisory formulate plans so that the burden of tax on them, when the time comes, is less. Do you need professional assistance with planning your taxes on your retirement income? Call our service professionals at Flagship Financial