Money Culture

How Federal Taxation Drops for Retirees

Chart: taxes

Taxes are not as inevitable as most people assume. As the chart shows, the share of Americans paying federal income taxes falls precipitously after age 60.

Young adults often have little or no tax liability, because they’re either in school or aren’t yet earning very much. Older people revert to a similar picture, after having paid taxes all their lives.

The peak occurs around age 50, when nearly 80 percent of households pay federal income taxes. That share plummets to half at age 65 and to just over a third at 70, according to The Hamilton Project at The Brookings Institution, which produced the chart. [The chart is based on 2007 data; there may be some changes in current data, though not in the age patterns.]

This is important information for most baby boomers, because their tax picture will change dramatically in retirement. Taxes paid, as well as the share of people paying taxes, decline because retirees’ incomes generally fall below what they earned while they were working.

Further, U.S. tax policy provides additional deductions and credits for people over age 65. While some people pay taxes on their Social Security benefits, this usually happens, according to the Social Security Administration, “only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.”

As the chart makes crystal clear, tax considerations are a crucial part of retirement planning. Learn More

Feature

Field Work

Retirees’ Tax Puzzle: Pay Now or Later?

The majority of retirees pay no federal taxes. But taxes should be a concern for retirees who have retirement savings. That’s because the money they take out of their retirement accounts for living expenses will be treated as federal taxable income. It’s difficult enough to figure out how much money to withdraw – and when. Taxes are a separate but related issue.  

In this blog, we interviewed Michael Kitces, a well-known financial adviser and partner with a Maryland financial firm, who writes the “Nerd’s Eye View” blog. He discusses the basics of navigating the tax code. The challenge facing retirees is to make tax decisions today that will minimize taxes now and in the future.

Question: Do you find that new retirees are surprised by their retirement tax situation?  

Kitces: It’s usually not even on their radar screen. Pre-tax and post-tax income, different tax buckets – I don’t think most people even think about it once they’re in retirement. That’s why we’re still seeing people who are “surprised” when they turn 70½ and the required minimum distributions (RMDs) begin, and their tax bill gets a whole lot higher. They say, “Why didn’t we plan for this?” We say, “We’ve been recommending you plan for this for years!” …Learn More

Money Culture

Why Most Elderly Pay No Federal Tax

Chart: Tax pieA March blog post pointing out that a large majority of America’s older population pay no federal income tax seemed to surprise some readers – particularly retirees who must send checks to the IRS at this time of year.

“[M]y annual tax liability is and will continue to be greater than when I was employed,” said one such retiree.

Readers’ comments are always welcome, and this time they’ve thrown a spotlight on a shortcoming of the article.  It did not fully explore why most retirees – roughly two-thirds of 70 year olds – pay no federal income tax.

According to a Tax Policy Center report, “Why Some Tax Units Pay No Income Tax,” tax filers over age 65 are the largest single group to benefit from special provisions of the tax code designed to help various types of people. The elderly receiving tax preferences make up 44 percent of filers of all ages who are moved off the tax rolls by these tax breaks, said the Center, a joint effort of the Urban Institute and the Brookings Institution.

Of course, retirees pay all sorts of other taxes, including property tax and state sales and income taxes.  But it’s essential for baby boomers to understand this federal income tax issue as they plan for retirement. …Learn More

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On the Web

Our Readers’ Favorite Blogs in 2016

The 10 articles that received the most attention from our readers last year are ranked below in the order of their total page views.  Retiree taxes and Medicare made up the top three:

Why Most Elderly Pay No Federal Tax

Medicare Advantage: Know the Pitfalls

Federal Taxation Drops for Retirees

Financial Fallout from Gray Divorce

Stress is One Reason People Retire

How Many Years Can You Do Your Job? …Learn More

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Research

Our Readers’ Favorite Blogs

It’s the time of year when we highlight blogs that attracted the most page views over the previous six months, according to Google analytics.

Today, we’re listing a “baker’s dozen” – 13 blogs – popular with our readers, instead of the usual top 10.  This allows us to highlight some interesting themes that were apparently on readers’ minds:

Many retirees weighed in with their comments on two blogs about how and why they’re taxed:

  • How Federal Taxation Drops for Retirees
  • Why Most Elderly Pay No Federal Tax

A new feature called “Boomers: Rewriting Retirement” that profiles people who are either approaching retirement or recently retired made the list:

  • A Familiar Dilemma: to Work or Retire

Squared Away tried something else new – two quizzes on financial topics – and many readers took them: …Learn More