In and of itself, retirement doesn't change the way you get treated under the tax code. You still pay tax at the same rates and the laws that govern your deductions generally aren't tied to your age. However, most people's lives change when they retire. They stop working, frequently move to a smaller house and may even move to a different state. All of these lifestyle changes can impact your taxes and deductions.
Taxpayers that claimed a deduction for unreimbursed employee expenses while they were working will lose the opportunity to deduct those expenses when they stop working. While many of these expenses should also go away when you retire, some may not. As such, you could end up with higher taxes without a dollar-for-dollar matching decrease in your expenses.
Retirement Plan Contributions
When most people retire, they stop contributing to their tax-advantaged retirement plans and, instead, begin to draw from them. Once you reach 70 1/2 years of age, the IRS will require you to start taking distributions from your individual retirement arrangements. This creates a double liability on your taxes. On one hand, since you are no longer writing off contributions, you have fewer deductions. On the other hand, your distributions are taxable as regular income, so you will have to pay additional tax because of them.
State Income Tax Deductions
Many people retire to states with no income taxes to help stretch their retirement accounts further. If you choose to do this, you will lose the opportunity to write off state income taxes. Although the IRS will let you write off state sales taxes in lieu of state incomes taxes in 2013, that law requires periodic renewal and may not be in effect when you retire.
As you near retirement, you may find that you have less home mortgage interest to write off. As your mortgage draws closer to being paid off, each payment has a little bit more principal and a little bit less tax-deductible interest. If you pay your mortgage off completely, you will have no interest to deduct. This is also the case if you sell your house and move into rental housing since rent is not tax-deductible.
Ending Itemized Deductions
For many retirees, the change in income and lifestyle can actually lead to a situation where claiming the standard deduction makes more sense than itemizing deductions. While this eliminates your ability to specifically deduct many things, you should come out ahead since the only reason to do this is if the standard deduction is worth more than your itemized deductions would be. For tax year 2012, the standard deduction is $11,900 for married couples that file jointly and $5,950 for single people. For 2013, the standard deduction is $12,200 for married couples filing jointly and $6,100 for those filing as single.
- IRS: Schedule A (Form 1040)
- Kiplinger: Required Minimum Distributions for IRAs and 401(k)s
- Retirement Living Information Center: Taxes by State
- Q13 Fox: State Sales Tax Deduction Will Be Extended for 2 Years
- NewRetirement: Ask Bud - Paying Off a Mortgage Early
- Liberty Tax Service: Taxes After Retirement
- Forbes: IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More
- Jupiterimages/Photos.com/Getty Images