8 Things You Need To Know About Taxes Once You Reach Age 65

Article originally posted to Forbes.com.

Tax planning doesn’t necessarily get easier as you age. There are times when taxes get more complicated as you get older. When taxes are complex, there are more opportunities to benefit from proactive tax planning. This could be good news in the form of tax deductions and tax credits.

Tax often feels more complicated as you age, partially because you likely have more sources of income. Not to mention once you leave the workforce, you must deal with tax withholdings on your own. Other tax complications exist around Medicare premiums, Social Security, and Required Minimum Distributions.

There is a lot of talk about taxes being lower in retirement. While this sounds like a good thing, ideally, your income remains the same (or is higher) than when you were working. In this (good) scenario, maintaining your standard of living in retirement might mean paying more taxes once you have retired.

1. Tax Planning Doesn’t End At Retirement

Just because you’ve left the workforce doesn’t mean you should retire from tax planning. There are still plenty of ways to reduce your taxes each year once you enter retirement. There are also a variety of tax-planning strategies that can help stretch your retirement income over your lifetime.

2. Income Levels Can Change Your Medicare Premiums

Your realized income can affect the premiums you are required to pay for Medicare Part B and Medicare Part D. This is due to IRMAA or the income-related monthly adjustment amount for Medicare. Your yearly premiums are based on your tax returns from two years prior. This is where proactive tax planning to help minimize your taxable income can go beyond just a lower tax bill each year; it can save you money on Medicare premiums.

IRMAA surcharges work like a cliff, not as a phase-in, so you will need to plan ahead to avoid inadvertently increasing your Medicare premiums when you pull some extra money out of a retirement account or realize some capital gains.

3. You Can Donate Required Minimum Distributions Directly To Charity

Once you reach the age of 73, you must start taking the required minimum distributions from your retirement accounts (think 401(k), IRA, or Cash Balance Pension Plan ). This is called a qualified charitable contribution. When employing this tax-planning strategy, you avoid your RMD increasing your income.

4. Running a Business Or Side Hustle In Retirement?

It seems consulting, running a side hustle, or even a small business is part of the new retirement. Many retirees have some type of earned income that brings a bevy of tax-planning strategies to the table.

Even earning a little extra income from a side gig could be considered business income (assuming you aren’t paid as an employee). This could allow you to deduct health insurance premiums, home office expenses , and other tax deductions available to small business owners.

When you have self-employment income, you can also contribute to wider retirement plan options. You may be thinking; I’m retired; I don’t want to save more money for retirement. However, if your spouse is still working, contributing to a SEP IRA, Solo 401(k), or a Cash Balance Plan you might find your household in high tax bracket and contributing could help lower your household income. You might even want to set up a Roth 401(k), which could help you grow more tax-free retirement income in the future.

5. Remember, Your Social Security May Be Taxable

Many people think that taxes end once you retire. Sadly, many retirees have incomes so low that they don’t owe much if any, taxes on their retirement incomes- which is often just Social Security. I will generalize and say most people reading this post would have difficulty living on even the maximum Social Security benefit.

Social Security begins to be taxable at just $25,000. Fortunately, benefits are taxed at slightly lower levels than other types of income, but taxes will be due nonetheless. If you near the Social Security taxability threshold, strategically planning IRA withdrawals can be advantageous. Maybe you take an extra IRA withdrawal one year or fewer withdrawals during another year to reduce taxes on your Social Security benefits.

6. State Tax Breaks On Retirement Income May Be Available

You are probably aware that where you choose to live in retirement will affect the income taxes due on your income. What you may not know is that all states do not tax various types of retirement income in the same way. Some states don’t tax certain retirement income at all (I am not just talking about states without an income tax).

7. Tax Loss Harvesting

If you have been investing for any significant amount of time, you should be sitting on a considerable amount of capital gains. As you retire and begin taking income from your investment accounts, many retirees are forced to realize some of those capital gains. Tax loss harvesting can help offset your retirement tax burden each year. Talk with your tax-planning financial planner to develop a strategy to help you pay the least amount of taxes over your lifetime.

8. Sometimes More Taxes This Year Is A Good Thing

No, I’m not crazy. Sometimes paying a little more taxes today rather than a ton more later is actually a good thing. If this weren’t the case, no one would put money into a Roth IRA instead of a traditional IRA. It may be tempting to spend all your low(er) tax retirement assets first (brokerage accounts and Roth IRAs) before dipping into your account that has taxable withdrawals (401(k), 403(b), IRAs). However, this could leave you with a title wave of taxes later in life, with little room to strategically lower your taxes.

Your retirement income plan ideally has a bit of tax diversification. Hopefully, you have a combination of income that is tax-free (think Roth IRA), taxable income (think IRA) and income subject to capital gains (brokerage account). Depending on your overall retirement assets and retirement income needs, you may want to pull some money from each of these buckets to keep you in the lowest tax brackets possible. This can also help make less of your Social Security taxable and reduce or eliminate IRMAA surcharges, which increase your Medicare premiums. This may slightly increase your income taxes now but could reduce your lifetime income taxes.

Think of it this way: Would you rather choose to pay some taxes each year in the 10% to 12% bracket or be stuck in the 32%, 34% or 37% tax brackets later on in life? Either way, proactively planning to minimize taxes in retirement can decrease your chances of running out of money as you age. It can also help you increase your take-home pay each year and minimize your overall lifetime tax bill. I’m a big fan of taking steps to have the happiest retirement possible, and I don’t think I’ve ever met anyone who gets joy from paying a bunch of taxes.

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