Retirement is an exciting time of life when you’re free to take on new hobbies, travel, and relax after a long period of focusing on your career and family. But one aspect of your working life that remains a reality into retirement is your obligation to file taxes.
If you’re part of the baby boomer generation now reaching traditional retirement age, you grew up in a financial world that transformed drastically through the decades. Boomers were among the earliest investors into retirement plans, as well as the first generation to use credit cards.
Whether you plan to travel or perhaps purchase a new home, your financial plans for retirement should always be made with your tax obligations in mind. Here’s what retirees need to know at tax time:
Look Out for Tax Law Changes
Year over year, tax laws can change, sometimes significantly. In 2017, American seniors received some good news in the realm of tax reform, and those changes will remain in place at least through 2019. The U.S. tax code has been simplified, meaning that you may experience less of a headache when it’s time to file. Additionally, marginal income rates have dropped, which means that your taxable Social Security income will likely be lower than previous years.
Taxpayers of retirement age in Canada also saw changes in 2017. The CRA’s new tax services are designed to simplify the filing process, and you may not even need to leave your home to pick up forms. If you typically mail your income tax return, expect to receive new printed tax forms and guides in the mail. Or, if you’d rather not bother with paper forms at all, try out the CRA’s free File My Return phone service, available by invitation.
Your IRA or RRSP Status Matters
Depending on your employment status over the long term, you have likely built up funds in a Registered Retirement Savings Plan (RRSP) or an individual retirement account (IRA). Both accounts come with an age stipulation. Those who have invested in an RRSP must cash out the plan when they turn 71. Alternately, you can opt to roll over your monies into a Registered Retirement Income Fund (RIF), which increases both your savings and your overall tax benefits.
As for retirees who invested in an IRA, mandatory distributions are required when you reach the age of 70 1/2. And whether you set up an IRA based solely on employment-based contributions or you added additional funds from time to time, you must claim that money once you dip into your IRA. But not all IRAs are the same — your tax obligations may vary significantly depending on whether your IRA contributions were deductible or nondeductible. Understanding that difference and choosing the correct form is imperative to the tax filing process.
Any Pension You’ve Accrued May Affect Your Income Tax
Pensions are the cousins of the IRA: a pension plan is a retirement fund set up by your long-term employer, but you have no real control over the money. With a pension, your employer will provide a monthly stipend upon retirement that’s generally based on your length of employment.
While most retirees would welcome a monthly payment, the majority of pensions are considered taxable income, meaning you could end up owing the IRS. The good news is that pensions are increasingly being pushed to the wayside in favor of nondeductible IRAs, which typically require fewer out-of-pocket costs from your employer.
Take Advantage of Senior-specific Tax Deductions
Doctor’s visits are just part of the game once you reach retirement age; fortunately, you may be able to claim deductions on your medical care, including some prescriptions and medical transportation.
In some cases, especially if you or your spouse are receiving home health care or are a resident of a Continuing Care Retirement Community (CCRC), you may be able to deduct some of your living expenses. Always make sure to ask a tax professional if you have any questions about whether a particular medical or dental expense is tax deductible.
U.S. residents who are covered under Medicare can deduct any premiums paid, as well as co-payments and any out-of-pocket medical expenses that exceed 10% of your adjusted gross income. Those deductions can result in significant savings come tax time.
Consider the Financial Benefits of Overseas Travel
All this tax talk getting you down? If you’re feeling healthy and ready for adventure, why not see the world? Travel is an integral part of life for many retirees who finally have the freedom to visit far-flung locations that may have spent many years gathering dust on your bucket list. Overseas retirement planning should be done well in advance, if possible, so that there are no surprises come tax time.
A person’s “tax residency” comes in to play after one spends a significant time overseas. And while the specific length of time can vary by country, retired taxpayers should be aware that their filing status and obligations are likely to be very different where overseas residency is concerned.
Taxes: Your Partner in Retirement
No matter if you live in the U.S. or Canada, April is the month to remember when it comes to taxes. U.S. residents must file by April 15 or incur a penalty. In Canada, you have until the end of the month to file the previous year’s taxes.
You don’t have to uncover the tax secrets used by the wealthy to live comfortably in retirement. By planning ahead, ensuring that tax forms are in order well in advance, and thinking outside the box, “filing your taxes” may just lose its negative connotations during your golden years.