Retirement Planning

6 Liabilities That Put Taxes on Retirement Income

The IRS continues to add and change tax laws that could impact you in retirement. Find out which may affect you and how to plan for them.

Tax Provisions Affecting Retirement Income

Did you know that the IRS continues to adjust more than 40 tax provisions every year?1 With the constant flux of new rules and tax laws, it has never been more important to learn how certain tax liabilities can affect your retirement income.

Whether you're pre-retirement, still planning for retirement, or living in retirement, here are seven of new tax provisions that you should know about when planning for your golden years.

  • The IRA rollover limit.

    Beginning in 2015, you will be limited to only one IRA rollover per calendar year, regardless of how many IRAs you own.2 With a rollover, you transfer money out of one IRA into another (such as a traditional or Roth IRA). The tax consequence for completing more than one rollover will result in your income being taxed, as well as a 10 percent penalty if you're under age 59½.

  • Social Security taxation.

    How much Social Security taxation you can expect depends on your total income. The higher your income is, the more taxes you'll pay on your benefits. For example, if you and your spouse file a joint return with a combined income between $32,000 and $44,000, up to 50 percent of your benefits may be taxable. If your combined income is more than $44,000, you could be taxed as high as 85 percent.3

  • The state death and inheritance tax.

    In 2016, the federal estate tax exemption (the amount of money you can pass onto to your heirs tax free) has increased to $5.45 million - double that for a married couple.4 However, if your estate is valued closer to the $1 million dollar mark (or less in many states), you may be subject to a state death and inheritance tax. This additional state tax means that your heirs may be forced to give up a sizable chunk of their inheritance when you pass away.

  • The personal exemption phase-out.

    As part of the American Tax Payer Relief Act, you're allowed to deduct a personal exemption for yourself, your spouse, and all eligible dependents. However, the amount that you'll be able to deduct will soon be reduced under the new personal exemption phase-out (PEP). Based on a specific income threshold, the total amount of personal exemptions in which you are entitled to will be reduced, and eventually eliminated, at a rate of 2 percent for every $2,500 of income that goes above that set limit.5

  • Itemized deduction phase-out.

    Much like the PEP, the amount of itemized deductions that you can take will be based on a certain income threshold. Exceeding this limit means that your deductions could be reduced by three percent of the amount you go over, and up to as much as 80 percent of your otherwise allowable itemized deductions.6

  • The health insurance penalty.

    You're probably aware that if you don't have health insurance you'll pay a penalty. To see how the fee is calculated, visit Healthcare.gov

1. http://www.irs.gov/uac/Newsroom/In-2015,-Various-Tax-Benefits-Increase-Due-to-Inflation-Adjustments
2. https://www.irs.gov/retirement-plans/ira-one-rollover-per-year-rule
3. https://www.ssa.gov/planners/taxes.html
4. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
5. https://www.irs.gov/publications/p501/ar02.html#en_US_2015_publink1000195627
6. http://www.irs.gov/publications/p17/ch29.html

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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Tax Planning

Tax planning is a vital part of planning for retirement. By understanding how taxes can affect your retirement income, you can plan ahead and keep more of your hard-earned nest egg. For more information, visit the Protective learning center.

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