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Did you retire early last year? If yes, congratulations.
You’ve probably worked hard for many years so you can start the next phase of your life earlier than most people. But before you head to the golf course or hop on that cruise ship, below are some taxes you should know about.
Plus here are some tax tips for you to keep more of your money.
federal and state income taxes
If you live in a state that imposes them, you’ll pay federal income taxes – and state income taxes – as long as you have income, regardless of your employment status. In retirement, distributions from your qualified retirement accounts are taxed as income, so you’ll pay taxes on them.
One thing that some early retirees wonder about is how much income tax they’ll owe when they leave the office for the last time. Your exit from the workplace may result in a small increase in income from things like accrued vacation time or stock options.
Here’s another thing that may come as a surprise to new retirees: If you took a loan against your 401(k) and you leave your job before the loan is fully repaid, any remaining balance will be considered a taxable distribution. ir. So that $5,000 loan balance is treated like your income and taxed.
net investment income tax
If you have income from investments that exceeds your investment losses, you may be subject to the 3.8% net investment income tax (NIIT). Net investment income includes passive income such as capital gains, interest, dividends, rental and royalty income, and non-qualified annuities. It does not include Social Security benefits, employment income, alimony, or unemployment compensation, nor does it include gains on the sale of your primary residence.
NIIT is levied on the amount of your net investment income. Or if your MAGI is above the following amounts:
- $200,000 if you are single or head of household
- If you’re married, file $125,000 separately
- $250,000 and you are married filing jointly or are a qualifying widow with one child
It may be based on the amount of income above those amounts, if that amount is less than your net investment income. In other words, it is the lesser of your net investment income or the amount of your MAGI that exceeds the listed amounts, according to ir.
additional medical tax
There is another tax that some retirees need to understand if it applies to them. Per irThe Additional Medicare Tax is a tax of 0.9% that applies to Railroad Retiree (RRTA) compensation as well as Medicare wages and self-employment income that exceeds the following limits:
- $200,000 if you are single or head of household
- If you’re married, file $125,000 separately
- $250,000 and you are married filing jointly or are a qualifying widow with one child
Retirement may be a time of less worry and stress, but taxes will always be there. Knowing ahead of time what they are likely to do can make them a little easier to manage.