This past year was the first year that I was fortunate enough to work from my home. Working from my home has been a wonderful change for both personal and professional reasons. The only thing that caused a slight issue was the tax filing changes that I had to endure. The office in my home was now considered a tax deduction. I had to get some help learning how to deduct the things that are allowed on my federal taxes. If you are new to working from home and have a home office, this blog can help you learn what you need to know before tax time rolls around.
As you approach retirement, you know that many things about your life and finances will change. But what exactly those changes will or won't look like is often still a mystery. One of these often-confusing areas is income taxes. What will change about your tax obligation? And what can you expect to stay the same? Here are a few key things to know.
How Taxes Stay the Same for Retirees
So, what can you expect to stay the same when it comes to retiree taxes? First, the tax rates and percentages for all Americans are based on income. Your age by itself doesn't decide how you'll be taxed. Rather, your income and sources do.
Most retirees draw from tax-deferred retirement accounts (such as 401(k) plans and traditional IRAs) or pensions. These are generally taxed at the normal rate for your income level. On the other hand, Roth IRAs and some Social Security income are tax-free at withdrawal. Therefore, your customized mix of income sources determines how similar your effective rate of tax will be.
If your personal life doesn't change significantly upon retirement, your tax credits and deductions may not change either. If you are still providing a home for older children or other family members, for example, retiring will not affect your ability to claim them as dependents for tax purposes.
How Taxes Change for Retirees
The biggest change most retirees experience actually comes from their reduced income or increased sources of nontaxable income. Because expenses in retirement are often lower than when you were working or raising kids, you may not withdraw as much per month. Less income means a lower tax rate (or percentage of income) and a lower overall bill. Nontaxable income can also dramatically lower your taxes.
The other large change usually comes from the loss of deductions and tax credits. A business owner, for instance, may lose business-related deductions (such as self-employed health insurance) after divesting the business. Additionally, if you retire because your kids have officially moved out, child-related tax deductions also go away.
The good news is that you may have access to additional tax credits or deductions depending on how you fill your retirement time. If you are now able to volunteer more often, you may be able to deduct some related expenses. Further, a retiree who goes into part-time consulting work may now be able to deduct business expenses as an independent contractor.
Where You Can Learn More
Anyone approaching retirement should consult with an experienced accountant who specializes in income tax preparation before making decisions. Taxes can have a big impact—positive or negative—on your plans for this new chapter. Contact an accountant to learn more about your tax preparation.Share
6 October 2020