6 Life Events That May Have Tax Consequences for Seniors and Retirees
You don’t stop paying taxes or having to deal with taxes when you reach a certain age; retiring, losing a spouse, selling your home or even getting sick can all impact your tax burden each year. It is important to understand the life events that occur when you hit your senior years and the way that each could potentially impact your financial life and the amount of money you pay to the IRS each year. Knowing that each of these significant life changes will impact your tax returns gives you the opportunity to strategically plan out your options and choose the path that is the best for your own personal situation.
6 Life Changes that Have Tax Consequences for Seniors
When you retire, you switch from making contributions to a retirement fund to actually withdrawing funds to live on. The way you withdraw those funds and the timing you choose will have a dramatic impact on how much money you’ll lose to taxation. A well thought out plan is a must if you want to avoid being aggressively taxed and want to hold on to your hard earned money. Withdrawing money from an IRA too early can also add to your costs; knowing how much it will cost you to access your funds can help you make the right decision about your retirement timing.
Collecting Social Security
Depending on when you begin collecting benefits (the earlier you sign up the greater your tax burden will be) and how you handle your other retirement income, you’ll still have to pay taxes on your social security income. The way you set up your retirement benefits and distributions has a direct impact on the taxation your Social Security will be subject too. Carefully planning out your distributions can help ensure that you truly keep the maximum amount of income coming in and that you don’t have a nasty surprise at tax time.
Getting divorced from your spouse at any age is an expensive proposition, but by the time you reach retirement age, you’ll really feel the pinch. If you have been married for a long time, then you’ll likely be parting with half of your retirement, your home (or equity) and other assets. If you are the breadwinner, you’ll usually be required to pay alimony as well after a long term marriage. While every case is different, when you divorce as a retiree or senior, there are some pretty hefty consequences to consider up front and at tax time. If you have to sell your home because of the divorce, split your retirement or even seek out other healthcare insurance options, you’ll have some significant changes to cope with at tax time too. While money shouldn’t be the thing that keeps you married, you should be aware of the potential cost of divorce – both the upfront big ticket items and the later cost in tax penalties or reduced deductions.
Loss of a Spouse
Becoming a widow or widower will affect your whole existence, including the way you pay taxes. From filing your spouse’s last return and filing as an individual for the first time to learning about the tax implications of your assets, inherited property and life insurance, expect this life changing event to change the way you deal with money and taxes, too, even if you are not the executor of your spouse’s will.
Changes in Medical Benefits or Needs
When you retire from an employer, you will likely have to find a different type of health coverage. Whether you qualify for Medicare or prefer a private insurer, the way you handle your medical expenses will have a direct impact on your taxes. A single medical event can have far reaching implications on both your expenses and your tax liability. It may also be time to consider long term disability insurance to protect your assets and income in the event of an illness or injury.
Downsizing a Home
Selling the family home will have several consequences beyond the feeling of an empty nest. If you sell your home and buy another, smaller place without a mortgage, then you’ll miss out on the annual mortgage interest deduction you’ve been enjoying. You may also face some taxation on the gains from your home as well.
Forging ahead into retirement or making big life changes without researching the potential tax and money issues could end up costing you a lot of your hard earned income and a big chunk of your nest egg. Taking the time to think about these potential big life events now can help protect you in the future and ensure that you get the best out of your retirement years.