Planning For Taxes In Your First Year of Retirement with Laura Caiafa, #80
Everyone has their own unique tax puzzle. Retirement can be an especially challenging time because there are many uncharted waters to navigate for new retirees. Did I pay enough taxes during the year? How can I avoid paying penalties altogether? Questions like these can seem intimidating, but they don’t have to be! On this episode, I’m joined by tax expert Laura Caiafa to give you the answers you're looking for and help you breeze through your first tax season in retirement.
You will want to hear this episode if you are interested in...
Getting to know Laura Caiafa [1:00]
Pitfalls of paying your taxes on the back-end in retirement [2:34]
How the IRS determines underpayment penalties [4:43]
Best ways to avoid paying an underpayment penalty [6:21]
Setting up quarterly estimated taxes and thoughts on intentionally overpaying [9:36]
Exploring deductions as a new retiree [11:58]
The logistics of changing your residency to avoid income tax [14:23]
Final thoughts [17:33]
Tax professionals can help you avoid IRS headaches
Bottom line: The IRS wants their money evenly throughout the year. If you don’t pay enough taxes throughout the year or you pay late, the IRS can hit you with an underpayment penalty that averages around 3% of what you owe. You can avoid the penalty by making sure that your tax balance due at the end of the year is under $1000. The real question is why would you want to give a free gift to the IRS? As Laura said, there’s no reason to pay this penalty and it’s easily avoided with tax planning. Avoid this headache altogether by paying the correct withholding or even estimated taxes. You may have “less” money during the year, but it’s better to pay some now than lose even more money to a pointless fee.
A common question we get is “Should I intentionally overpay my taxes to avoid penalties or an end-of-year tax bill?” By intentionally overpaying, you’re giving the government an interest-free loan that gets you zero brownie points. There’s no benefit to overpaying at all, other than maybe peace of mind that you won’t owe anything when tax season comes to a close. But that’s where using a tax professional comes in handy! They can figure out roughly what you’ll need to pay the IRS and even build in an appropriate cushion to ensure you’re paying enough while keeping the majority of your money with you.
Retirement is the perfect opportunity to re-evaluate your deductions
Unfortunately, there aren’t any deductions available just for entering retirement. Standard deductions are quite high these days, coming in at a whopping $25,000 for married couples. That makes it difficult to get the maximum tax benefit on an annual basis. Philanthropic retirees can maximize their contributions by switching between itemized and standard deductions each year. Meaning, clients can save all of their charitable giving for a year that will push them above the standard deduction, instead of constantly falling below it.
There are also state-specific deductions on retirement income that you may be able to take advantage of. Retired teachers in Connecticut can subtract 50% of the income received from the state teacher's retirement system on their state taxes. Additionally in Connecticut, there is a subtraction modification of 28% for pension and annuity income and you can exclude Social Security income altogether on your state taxes. Other states may have similar deductions so do your research and reach out to a tax professional for more information!