A Tax To-Do List
Dealing with some common tax issues facing new retirees.
Last week, I wrote about things new retirees need to be aware of as they make the transition into this new phase of life. This week, I want to focus on tax issues, and for that I’ve called on my associate, Bob Leins, CPA, for help.
But before I get to some commonly asked tax questions, I wanted to address some comments from last week’s column. Several of you said you had retired on Dec. 31, 2012, or Jan. 3, 2013, and had yet to receive any retirement benefit. Keep in mind that if your retirement began in January, your first retirement check would be dated Feb. 1, and you might not receive that check until mid-February at the earliest -- and it will be an interim payment. In the meantime, you should receive your final paycheck from your agency as well as the lump sum payment for accumulated and accrued annual leave.
By the way, the Office of Personnel Management received 22,187 new retirement claims in January. The backlog of applications now stands at 36,062 pending cases. So be prepared to be in interim status for at least a few months -- maybe more.
Now for Bob Leins’ response to the tax questions…
What is the biggest misunderstanding that employees have regarding taxes and retirement planning?
My pet issue is that retirees, as well as others, don’t fully understand tax brackets. Not that they should be tax accountants, but people have a hard time understanding that if a dollar is withdrawn from a taxable investment like the Thrift Savings Plan or fully taxable traditional Individual Retirement Account, the amount will be taxed at their highest tax bracket, both on the federal and state level.
For example, suppose an individual takes a $1,000 fully taxable distribution at a federal income tax rate of 15 percent and a state rate of 5 percent. If they need the full $1,000, they’ll have to withdraw $1,250. If they’re in a higher federal bracket, say 25 percent, they’d have to withdraw $1,428.50 to net the $1,000.
What about Social Security taxes and Medicare premiums?
Social Security benefits are tax-free for some people, but for others, part of the benefit is taxable. The taxable part of benefits usually can’t be more than 50 percent. However, up to 85 percent of benefits can be taxable if either of the following situations applies to you:
- The total of half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
- You are married filing separately and lived with your spouse at any time during 2012.
IRS Publication 554: Tax Guide for Seniors
more information on Medicare costs
During the interim retirement period, OPM does not withhold state income tax from my retirement benefit. What should I do if I live in a state that taxes federal retirement benefits?
How can I find out which states don’t tax federal retirement benefits?
I’ve heard that part of my retirement is tax-free. Is that true?
IRS Publication 721
Does this apply to both the federal and state tax returns?
I might need to take some money from my TSP account after I retire if my first retirement checks are too small to cover my expenses. Any tax strategies that I can use here?