Retirement and Taxes

          Once you reach retirement age your life will change.  You’ll no longer have to get up every morning to go to work.  You’ll be on a limited income and a tighter budget.  You’ll also probably have to spend more money for medicine and health care. 

            In addition to all of this, your tax situation will change.  If you’ve just retired then you’ll have a lot of interesting things to learn.

            First, you will still have to report your regular income for the part of the year you weren’t retired.  This means your W2 income and consequently withholdings will be less for the year that you retire in.  This means that you should not count on your withholdings to pay your complete tax liability for that year. 

            Second, you will also have to figure out whether you will have to pay income taxes on the distributions from your IRA now that you’ve reached the qualified distribution age.  If you paid taxes on your IRA when you deposited the money into the account, you will not be assessed taxes on the distribution, something to think about if you’re planning for retirement. 

            Next you’ll have to take a look at where your income after retirement is coming from.  If you get another job after you retire from your regular one, you’ll have to report that income as well.  Deciding to get a new job after retirement can be a tricky proposition, because it might affect your social security or government pension.  However, even if your new job pays you as an independent contractor, you will have to pay taxes on the income unless you make less than the reporting standard.

            The reporting standard is how much income the IRS has determined an individual needs to earn before they must file their income taxes.  The IRS changes its standards each year for inflation, so you should always check every year to make sure whether you are required to file. 

            However, if all of your benefits are from social security, a government pension (like Teacher’s Retirement), or Railroad Retirement benefits your benefits are generally not taxable.  If they are taxable, no more than 50% of your benefits will be taxable unless the total amount of your benefits and any additional income is more than $34,000 (in 2009) or $40,000 (MFJ), you lived apart from your spouse during the tax year, or you are a nonresident alien.  In those cases 85% of your total benefits may be taxable. 

            In addition, the IRS allows the elderly or disabled to take a special credit if they are over 65, your income is within the prescribed limits (as determined by the IRS), or have proof that you are completely and permanently disabled.  If you qualify for this credit, your federal income tax will be lowered by the amount you qualify for.