What Pre-Retirees Need to Know about Taxes

What Pre-Retirees Need to Know about Taxes
March 3, 2015 Pat Berg

When was the last time you met someone who actually looked forward to tax season? If the answer is, “Never,” don’t worry—you’re not alone. Tax time is both stressful and confusing for everyone. To make it a little bit easier this year, here are a few things you should know.

Your Traditional IRA contributions may not be entirely tax deductible. If you and/or your spouse are covered by an employer-sponsored retirement plan, such as a 401(k), then you may not be able to fully deduct your IRA contributions. If you are a single filer covered by a work plan and your modified adjusted gross income is $60,000 or less ($96,000 or less for those filing joint), then you may get a full deduction. If your income exceeds those limits, you may get a partial deduction or no deduction.

Roth IRA contributions may be eligible for a saver’s credit. Tax filers with an adjusted gross joint income of $60,000 in 2014 ($30,000 for single filers) may be eligible for a $2,000 ($1,000 for single filers) tax credit if they contributed to a retirement plan such as a Roth IRA or 401(k).

You won’t pay capital gains in an IRA. If you liquidate positions in a Traditional IRA, you won’t be taxed on the proceeds unless you take them out as a distribution. If they’re in a Roth IRA, you won’t even be taxed once they’re distributed.

Even retirees pay taxes. Retirees are not exempt from taxation. If you take a large enough income from tax-deferred retirement accounts, have a part-time job, get unemployment or alimony, have military retirement pay, gambling income or win prizes, you may find yourself with a tax bill.

Yes, that means Social Security income might be taxed. If you show a combined taxable income of $32,000 when filling jointly or $25,000 as a single filer, then as much as 85 percent of your Social Security income could be taxed.

It’s not too late to get 2014 deductions. You have until April 15th to make contributions to your IRA and HSA accounts and still get a 2014 tax deduction. Remember, if you’re over 50, you can contribute an extra $1,000 to these accounts.

If you sold your primary home, you may not have to pay capital gains tax. If you sell a home that was lived in and used as your primary residence for two out of the five years before its sale, you may not have to pay taxes on up to $250,000 in gains ($500,000 for joint filers).

Nonqualified accounts can be taxed even if you don’t take anything out of them. When dividends pay into your nonqualified brokerage account, you are taxed on that income even if you don’t take it out and use it. Likewise, if you earn interest or liquidate a stock that’s worth more than what you bought it for, you could be taxed. If you own mutual funds, you may also have a capital gains distribution from your account as a result of the fund manager liquidating mutual fund holdings at a gain. Your share of the distribution will be proportional to your ownership in the fund.

If you sold investments at a loss, you can write off the losses against gains. Losses are first written off against capital gains, but if your losses exceed your gains, you can write up to $3,000 off against income and then carry forward the rest.

Tax season can be intimidating, but with the help of your financial advisor and a little extra personal knowledge, you can get through this April relatively unscathed. Be sure to contact your advisor to help you with your taxes, as well as your retirement planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or products may be appropriate for you, consult with your financial advisor.

The Retirement Pros
March 2015

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