Planning For Taxes in Retirement

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Filing your taxes in retirement is important. You may have worked diligently your entire life, but the IRS still wants you to pay your taxes in retirement. However, there are many ways that you can combine your tax and retirement planning to save money.

Now, if you’re stressed when thinking about this topic, don’t be.

We’re going to walk you through the documents that you’ll need to make planning for taxes in retirement as simple and straightforward as possible.

What to Do If You Have Self-Employed Income

If you’re self-employed, you’ll likely receive your 1099. A 1099 means that taxes have not been paid on these dollars yet, so you’ll need to have this document when filing your taxes. If you’re still involved in a partnership, you may receive a K1 as well.

Investments can also generate a K1.

Unfortunately, K1s often do not get generated quickly. Many people get their tax returns done, file them and then have to start all over to incorporate this form into their taxes.

If you’re self-employed, you also need to keep everything in order to claim deductions, such as:

  • Check registers
  • Credit card statements
  • Business use asset information
  • Receipts

Anyone with a home office will want to consider whether or not they want to claim their office as a tax deduction, too.

If you’ve been paying your taxes quarterly, you’ll want to gather this data to give to your CPA so that they know what you’ve paid so far. 

Ideally, you’ll keep these documents in a folder throughout the year to make tax season less stressful. If you have everything in order beforehand, you won’t have to deal with the stress of getting everything in order come tax time.

Making estimated quarterly payments online on the official IRS website will be very useful, too. At the end of the year, you can log in to the website and print off a statement showing the taxes you paid throughout the year. This will make it very easy to supply your accountant with these important figures so that you’re not paying more taxes than necessary.

Note: If you happen to file an extension, the site only keeps records for 14 – 16 months. You need to print out these payments because they will include filing dates, which need to be filed to make sure that you don’t get penalized.

Rental House Income

If you have rental income coming in, you need to keep track of:

  • Rental income and payments
  • Expenses relating to the properties

You want to keep a record of every possible expense you made relating to these assets, along with the dates of these transactions and why these expenses occurred. You will need to file these taxes quarterly, so also keep this in mind.

Retirement Income

Retirement income is going to revolve around your 1099, and there are multiple forms of this document that you need to collect before filing your taxes. Most financial institutions have all the way until the end of February to get these documents to you.

You’ll typically have a 1099 sent to your mailing address, but a lot of institutions are putting these files online for you.

If you’re currently working, you’ll also receive a W2.

The W2 will show your:

  • Wages
  • Taxes withheld
  • 401(k) contributions

If you receive income from any of the following, they will generate a 1099:

  • Pension
  • 401(k)
  • IRA
  • Social Security

These documents will show how much you withdrew within a calendar year, how much taxes are withheld and more. Collecting these files will make it much clearer how much you’ll owe at the end of the year in taxes.

Traditional IRA basis is more complicated because these are non-deductible.

It’s important to gather all retirement income-related 1099s so that you can file your taxes properly. However, there is another form of 1099s, which you’ll need to know about before filing your taxes or handing your documents over to an accountant.

Note: 401(k) rollovers to an IRA will generate a 1099. The 1099R is a non-taxable distribution, so you can rest easy that you won’t be hit with a major tax liability. It’s important to work with a professional to ensure that these rollovers are done properly so that you don’t get hit with a major tax liability.

Savings, Investments and Dividends

Your custodian, such as Charles Schwab, will send you a 1099 for money that you have in savings, investments and dividends. Most custodians will have these files for you on their online portals.

In most cases, the file is ready around February 15, but this date can vary.

These 1099s will include:

  • Interest earned for any interest-bearing accounts
  • Dividends from a stock or ETF that paid an actual dividend
  • Capital gains, whether a short-term or long-term, which have different rates

You need to ensure that you receive this 1099 before filing your taxes. If you forget about this 1099, you’ll find yourself with a huge amount of taxes that the IRS says that you owe, which will then need to be cleared up by amending your taxes.

It’s better to wait until you have all the documents before filing your taxes, or you’ll have to deal with the stress and headache of making a tax amendment.

Tax-deferred accounts, such as an annuity, will generate a 1099 if you take a distribution through the annuity. You may have to pay taxes on interest here, too.

Home Ownership

Offsetting some of your taxable income is possible through deductions. If you have a mortgage or loan on your home, you may be able to write off this interest. You want to keep detailed documentation of your real estate and property tax records, receipts for energy-saving appliances and any other 1098s you receive in the mail.

Note: A lot of these deductions that we’re talking about will require you to itemize your deductions. If you don’t itemize, a lot of what we’re talking about in this section and the next may not relate to your situation.

Charitable Deductions

If you are charitably inclined, you can make the most out of your donations by itemizing your tax returns. We do this with many of our clients by using donor-advised funds, where we combine multiple years of donations into one year.

When you use this type of deduction, you can reduce your taxes dramatically.

You’ll need to reach out to us if you want to discuss using donor-advised funds to reduce your taxes. Donor-advised funds will require you to preplan because you cannot utilize this tax strategy for past taxes.

Medical Expenses and Health Insurance

If you itemize your tax return, you want to keep track of expenses for:

  • Healthcare
  • Insurance
  • Doctors
  • Dentists
  • Hospitals

Depending on these expenses, it may or may not make sense to itemize. Your CPA will help guide you on whether or not taking the standard deduction or itemizing is in your best interest.

Health insurance form 1095A will be generated and sent to you as proof that you have insurance. 

Additionally, HSA contributions will generate a 5498, which your CPA will need to receive credit for these contributions.

State and Local Taxes

Any time you pay state and local taxes, be sure to keep records of these payments. These taxes include:

  • Property tax
  • State income tax

Your CPA can use these taxes to try and save you money on your taxes.

Contributions to your traditional IRA can also be deducted from your taxes.

There’s a lot to go through here, but we recommend starting early and keeping track of these documents to make taxes less stressful. If you prepare for your taxes throughout the year, it will make tax season a lot less chaotic for you.

Click here if you would like to speak to us about donor-advised funds.