Kickstart Your Year with Smart Tax Planning

Taking proactive steps early in the year can optimize your tax situation and ensure a prosperous future. William Potter/Shutterstock

As we start a new year, many make resolutions to improve our finances. However, for retirees, tax planning is a key component of this strategy. After all, taking proactive steps early in the year can optimize your tax situation and ensure a prosperous future.

This post will explore twelve valuable tax tips specifically designed for retirees.

1. Assess Your Retirement Income Sources

It is common for retirees to have multiple sources of income. Among the many sources of income are Social Security benefits, pensions, withdrawals from retirement accounts, and investment income. However, the tax treatment of each source of income differs:

• Social Security benefits. Depending on your total income, as much as 85 percent of your Social Security benefits can be taxed.
• Retirement account withdrawals. A traditional individual retirement account (IRA) or 401(k) withdrawal is generally taxed as ordinary income, while a Roth withdrawal is tax-free if you meet the requirements.
• Investment income. Capital gains, dividends, and interest may be taxed at different rates depending on the type of income.

As you start the new year, gather statements from all sources of income and estimate your taxable income. As a result, you will be able to plan ahead for any tax payments or adjustments that you may need to make.

2. Evaluate Tax Withholding

Staying on the topic of taxes, retirees often underestimate the importance of tax withholding. As a result, you might owe the IRS when you file your taxes if you withheld too little last year. On the other hand, over-withholding means you’ve given the government an interest-free loan.