10 Tax surprises that could derail your retirement if you don’t plan ahead

For many taxpayers, a comfortable retirement is their primary financial goal. It’s also one that’s difficult to attain. According to Bloomberg, less than a quarter of American workers think they’ll have enough saved up to maintain a good standard of living when they hit retirement age.

If you make smart moves with your money, you might be able to retire early. But even in retirement, you won’t be saying goodbye to Uncle Sam. The IRS still wants to take a slice of your financial pie.

These are the top 10 tax surprises that you might face in retirement.

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1. IRAs and 401(k).

Contributions to a 401k are exempt from tax. Because these contributions are taken out of your paycheck prior to taxes, they also reduce your taxable earnings. The downside is that distributions from your 401(k) are still taxed as income, even if you’re retired.

The same applies to traditional IRAs. Any withdrawals from your IRA become income and are subject to tax. You can expect to pay taxes on withdrawals as per the IRS. online in Publication 590.

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2. Annuities

If you bought an annuity and it’s paying out in your retirement, any earnings beyond your original investment get taxed as regular income.

If you purchased the annuity with pre-tax money, it will be a slightly different situation. Instead, the entire amount will be treated as income.

3. Capital gains

Making your money work for you by investing while you’re employed is a stellar idea. However, that doesn’t mean you can dodge taxes on those investments after you retire.

Depending on your income, most long-term capital gains aren’t taxed any higher than 15% or 20%. You can get as low as 0%, or as high as 28%.

Stocks, bonds or mutual funds as well as qualified dividends are generally subject to the long-term capital gain rates of 0%, 15%, or 20%. Diversifying these investments can be beneficial. way to use your tax refund.

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4. Gifts

Gifts can be a great way to reduce estate taxes. In 2022, the maximum annual gift amount was $16,000. For 2023, it’s $17,000.

The basic exclusion amount for 2022 was $12,060,000 and it is now $12,920,000 in 2023.

Here’s the rub: Those amounts still face gift taxes. Furthermore, any amount that can be applied towards the exclusion will also reduce estate tax exemptions. And inheritances are also subject to taxation in some states.

5. Life insurance

The money you get as the beneficiary of someone’s life insurance plan isn’t usually taxable. It doesn’t get counted as income and you don’t have to report it. That doesn’t change if you’re retired.

The interest you receive will be taxable. And the situation becomes more complex if you’re the policyholder and surrender it for cash, particularly if you get more back than the cost of the policy.

6. Pensions

Any retirement payments you get from a pension or annuity are taxable unless they’re from a Roth plan. They’re fully taxable if you didn’t put any after-tax money into them, your employer didn’t withhold after-tax contributions from your salary, or you got your after-tax contributions tax-free earlier.

If you put after-tax money into a pension or annuity, it’s partially taxable, but taxes on the payments vary depending on what you contributed.

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7. Property taxes

Property taxes aren’t something you have direct control over, unlike a lot of other aspects of retirement preparation. But chances are, if you own a home, they’ll go up.

The cost of a home in America was more than $530,000 at 2022’s end, which is about twice what it was in 2012.

That might be great news if you’re looking to sell. It’s significantly less than great news if you’re a retiree with no interest in selling your home because it means rising property taxes will continue to siphon away your money.

8. Minimum distributions

If you were thinking to yourself, “Well, I’ll simply not withdraw any retirement savings and avoid potential taxes,” then we have some bad news. When you turn 72, you must begin taking annual withdrawals out of your retirement account.

The minimum amount is calculated based on the year-end account balance of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.”

While you can take out more money, any amount that is withdrawn must be included in your taxable income when you file your tax return.

9. Social Security

Although it might seem shocking, you must pay taxes on Social Security benefits. How much depends on your benefits and your and your spouse’s retirement income.

The tax rate is half of what you receive in benefits. If your total income, including benefits, exceeds $34,000 (or $44,000 if married filing jointly), or if you file separately from your spouse and live together, the taxable portion can rise to 85%.

The good news? 85% is the maximum amount that the IRS can tax.

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10. Tax breaks

It’s not all bad news. Older taxpayers and those who are retired have options to lower their tax bills.

First, if either you or your spouse are over 65, you will get a greater deduction. If either one of you are blind, the deduction is higher.

There’s also a tax credit (between $3,750 and $7,500) for the elderly or the disabled, though there are stipulations about who qualifies. And if you’re self-employed in retirement, premium expenses for Medicare Part B and Medicare Part D can be deducted.

Bottom line

There’s no way around it: Uncle Sam wants a bite of your retirement savings. Even death doesn’t really stop the IRS as Roth IRA beneficiaries are subject to required minimum distribution rules.

There are still ways to reduce your retirement tax burden. Diversify. Diversify your income by taking a bit from a taxable source as well as a little of a nontaxable. This can help you keep your taxable income lower.

It is always best to hire a professional tax accountant to help you with your retirement taxes. If you do decide to handle it yourself, however, use the best tax software.

FinanceBuzz has more:

This article 10 Tax Surprises That Can Derail Your Retirement if You Don’t Plan Ahead Original version: FinanceBuzz.

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