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Retirement Taxes and Senior Living

So you're planning to throw off the work shackles, retire, and start your second life. Congratulations! You've earned it. Maybe you're leaving Wisconsin for the coast of Georgia? It's beautiful and warm. Good choice.

Do you know how the Peach State taxes Social Security? How about your Civil Service pension? If you decide to work part-time do they have a personal income tax? What about property taxes? Is there a sales tax? Inheritance and estate tax?

When planning for retirement first think about what kind of lifestyle you want and how much it will take to afford that lifestyle. And even though you may no longer be working, the government is still going to want you to pay taxes. How much you're taxed will depend on (1) where you live, (2) what kinds of income you're receiving and (3) how much.

Taxable Social Security

Many states don't tax Social Security benefits, but it's still counted as taxable income. Here are some general guidelines to find out if you'll owe federal income tax on your Social Security income:

  • If you're single with a combined total income (all sources) of less than $25,000 you won't be taxed on your Social Security benefit.
  • Single with a combined income between $25,000 and $34,000, 50% of your benefit will be taxable.
  • Single with income over $34,000, 85% of your benefit could be taxable.
  • Married couples filing jointly, combined income below $32,000 is not taxed. Between $34,000 and $44,000, it's taxable up to 50%. Over $44,000 is taxable to 85%.

IRAs and 401(k) Taxes

Once you reach 59 1/2, you won't be penalized (10%) for early withdrawal on your IRA or 401(k). But you'll still pay the applicable state and federal income tax which varies widely from state to state. Some states have a dizzying array of tax credits, exemptions and scenarios too numerous to list. Roth IRAs are exempt because they've already been taxed. In some states like Maryland you're able to subtract your retirement pension unless it's from an out-of-state government pension. In other states, Alabama for example, you can subtract any out-of-state government pension from your taxable income.

Military Retirement

Some states follow federal tax rules for military retirement while others give these retirees tax benefits. Here's where you'll get tax benefits for your service:

Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming.

If you're receiving military disability pay, most states exempt this from federal income tax.

Estate and Inheritance Tax

The Federal estate tax (inheritance) is a tax on the fair market value of your property after you pass away. This generally includes cash, securities, real estate, insurance, annuities, trusts and other assets. The total of these items is your “Gross Estate”. Certain deductions (funeral expenses, charitable donations, etc.) can be taken that result in your “Taxable Estate”.

The states with the highest Federal estate tax? Connecticut, Florida, California, New York, Arizona.

In addition to the Federal estate tax, most states have limited estate taxes; some have no estate tax at all.

State Sales Tax

Sales tax is collected in all states but Alaska, Delaware, Montana, New Hampshire and Oregon. These states have the highest sales tax:

  • California (8.25%)
  • Indiana (7%)
  • Mississippi (7%)
  • New Jersey (7%)
  • Rhode Island (7%)
  • Tennessee (7%)
  • Minnesota (6.875%)
  • Nevada (6.85%)
  • Arizona (6.6%)
  • Washington (6.5%)
  • Kansas (6.3%)
  • Texas and Illinois (6.25%)

Life is a Series of Adaptations

Adapting to changing financial and life circumstances is nothing new. Indeed, we have been doing that exact same thing throughout our lives in response to changing circumstance. Whether it is buying your first home, saving for your children's education, or planning for your retirement, advanced planning is the key to evolving to new changes in your life.

Unfortunately, owing to the political debate that swirls around the Social Security topic uncertainly is at the heart of determining whether seniors should include SSI benefits as part of their retirement package.

Although not ideal, Social Security benefits are a crucial component of any well thought out retirement plan. Indeed, as of 2016, 51% of married couples and 74% of single seniors rely on Social Security benefits for more than half of their monthly income. For those wondering about the impact this has on the elderly community as a whole, 35% of those over the age of 65 lived in abject poverty in 1960 as opposed to less than 9% of that community in 2012. According to the Congressional Budget Office, estimates suggest that this poverty level would rise to 44% if not for the benefits supplied by the Social Security Administration.

Living Life to the Fullest in Retirement

In addition to ensuring a base line of income, your Certified Public Accountant (CPA) can help the senior in your life with basic accounting and book keeping services like bookkeeping and bill paying services. Accountants can help provide seniors and their families receive the peace of mind that they need knowing that the basic financial questions are being addressed which allows seniors to live life to the fullest during their retirement years.

Summary

One thing we learn as we age is the importance of relying on experts in the field. For the elderly worried that they might outlive their available resources, a very real fear among retirees, speaking to your CPA regarding the importance of studies emerging from the American Institute of Certified Public Accountants (AICPA), Eldercare is the first step in putting those fears at rest for the last time.

Under the accounting guidelines, the AICPA envisions advising elderly clients on the best ways to ensure that they do not live past their available income. Adding urgency to the task is the growing trend among retirees is to age in place. This impulse means that rather than transitioning into a skilled facility, nursing home, or family member's home, the retiree stays in their own place for as long as conceivably possible.

A big part of ensuring that they can remain in place is guaranteeing that they have the financial wherewithal to do so, and consulting with your tax professional is the first step towards achieving those results.

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