According to a recent Yahoo Finance article, taxes after retirement can actually become more complex than while you were working. Social Security income may or may not be taxed depending on what your “combined” income is. Taxes on investments may vary as well. In addition, the majority of retirement plan withdrawals will be taxed. Remember, those are just federal taxes, so don’t forget about state taxes as well!
Combined income can get complicated quickly, but it is what determines if you will have to pay taxes on Social Security, and if so, how much.
If you are single and your combined income is below $25,000, you will get to skip out on paying taxes on your Social Security income. However, if you make between $25,000 and $34,000 (or between $32,000 and $44,000 for joint filers), you may find yourself paying taxes on up to half of those Social Security benefits. If your combined income is more than $34,000 ($44,000 for joint filers), expect to pay taxes on up to 85% of your benefits.
Depending on your state, some, all, or none of your retirement income may be taxed.
Residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are among the lucky ones with no state income tax. Those who live in New Hampshire and Tennessee will also skip out on paying income taxes but will still have to pay taxes on money resulting from dividends and interest.
Residents of Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia aren’t as lucky. They can all expect to pay income taxes on Social Security payments.
The other states are not as clear or uniform when it comes to what percentage of Social Security income they may tax. They may apply taxes to some situations but not others. Likewise, keep in mind that property taxes can also vary widely depending on where you live.
When planning for retirement, do not forget to speak to an accountant or tax consultant to get a real understanding of what your income will be after taxes. It can save you from a lot of frustration later on.
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