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Katherine Ross [00:00:00]

Time to talk retirement and taxes. Joining me is Robert Powell a.k.a. Mr. retirement of The Retirement Daily. All right Bob, let's talk about this. What are three things that you think every retiree should know about taxes?

Robert Powell [00:00:14]

So I think the first thing is if you're getting Social Security benefits and you're either below full retirement age or after retirement age you need to know a couple of things about how Social Security is tax relative to your earned income. So if you're below full retirement age which might be different for different people anywhere from 65 to 67 and you're earning income what will happen is that if your social security will deduct one dollar for every two dollars that you earn above a threshold and for 2019 that threshold is $17,640 so let's give you a for instance if you were earning $20,000. That means 2650 above the threshold limit and so security will deduct. As I mentioned one dollar for every two dollars above or in this case they will deduct $1180 from your benefit leaving you with a net benefit of $820. So that comes as a big surprise for people they sometimes retire early and claim Social Security but they keep working and then they realize that their Social Security benefit isn't as large as they thought it would be. The second part of it is if you're older than full retirement age and working a couple of things happen. What happens is the IRS will look at your adjusted gross income add back in your taxable your non taxed interests over municipal bond for instance and then add back another half of your Social Security benefit to come up what's called combined income or original income. And if you happen to be for between thirty two thousand forty four thousand, fifty percent of your Social Security benefit will be taxable income. And if it's above forty four thousand eighty five percent of it will be taxable income. So then again people are sort of surprised by this notion that I'm collecting my Social Security benefit I'm expecting the full benefit I'm working and yet it's not what I'm expecting. So that's probably the first thing that people need to think about when they're thinking about Social Security and taxes is you're not necessarily going to get that full benefit that you thought you were going to get if you are working.

Katherine Ross [00:02:11]

If I'm getting ready for retirement is there anything that I need to do this tax season so if I'm retiring next year. Do I do anything this year?

Robert Powell [00:02:18]

Yeah. So I think you look at your sources of income and one of the things that you want to do is say OK my going to claim Social Security or not will I be working or not. How much of my income will come from interest income and dividends or capital gains for my personal assets and how much might come from my defined benefit plan if I'm a lucky to have it. And what you want to do is sort of do a what if scenario to say how much of that income puts me into a higher marginal tax bracket because the last thing you want to do is pump yourself up and have that next dollar of income tax at a higher rate. So you might want to say OK well maybe what I should do is not claim social security this year because I'm still working or maybe I'll claim Social Security but I won't work or and I will throw money from my retirement accounts and so it might be a really good idea for people to do that what if and if they can't do it on their own with a spreadsheet maybe go visit a CPA and have them do some scenario planning to say this is how you create the most tax efficient income in retirement.

Katherine Ross [00:03:13]

What is the most common mistake the retirees getting ready for tax season make?

Robert Powell [00:03:17]

Well I think the most common mistakes is right now especially with the new Tax Cuts and Jobs Act. People are now realizing that they no longer again itemize their deductions. So things because the state and local income tax provision being limited to ten thousand dollars. People are saying oh my goodness, I can't claim the mortgage interest or I can't claim my tax bill which you know in some cases as well over ten thousand dollars for people. And now the good news is that there's an offset to that right. Your standard deduction has now been doubled. Married Filing Jointly goes up twenty four thousand set of 12. So there may be some difference made up there. But the big mistake right now is people are probably thinking OK I still want to itemized my deductions but they may not be able to do that but they're still making charitable contributions. And so what they really need to think about is how do I go about creating itemized deductions that allow me to take advantage of the. Of being over the threshold of twenty four thousand standard deduction and they may need to start doing things like bunching their deductions. So instead of making the charitable contributions all in one year that you might do it every other year or every three years or postponing medical expenses that you might need to do so it now is a time really the biggest mistake is that people aren't tax aware, I would say. They really need to be more tax aware because now you're especially when you're retired, your resources of that much more limited, right? You're not necessarily earning a salary that you're getting pay raises every year for instance. So now you've got this limited pot of money that you have to make the most of at the same time you've got living expenses rising on you whatever it might be property taxes or car insurance or food or whatever it might be. So you've got this fixed amount of income and these rising expenses. Be tax aware.

Katherine Ross [00:04:58]

Is there any other advice that you for retirees who are getting ready for this tax season?

Robert Powell [00:05:03]

So I think the other thing that people need to start thinking about is how do I. If you don't have a Roth IRA start thinking about maybe converting your traditional IRA into a Roth IRA. Now you don't want to do it such that you bump yourself into a higher marginal tax bracket. So you want to do bracket planning so convert as much as you can. That brings you to the limit. And then think about how much I can convert the year after. And the reason they want to do that is something some people call account diversification. You want to have the ability to take money from whatever account gives you the most tax efficiency. So Roth IRA distributions are not taxed at all because they're they go in after tax. On the other hand a traditional IRA or 401(k) goes in pre-tax and all that money comes out as ordinary income which could put you in a higher bracket. So you want to be in a position to sort of again manage things so that you're pulling from the right bucket at the right time to keep you in the lowest marginal tax bracket.

Katherine Ross [00:05:52]

Bob thanks for joining me.

Robert Powell [00:05:53]

My pleasure Katherine.

Katherine Ross [00:05:55]

And for more from Robert Powell Mr. Retirement himself. Go to Retirement Daily

"If you're getting social security benefits, and you're either below full retirement age or after retirement age, you need to know how social security is taxed relative to your earned income," advised  Retirement Daily's Robert Powell. 

Powell sat down with TheStreet's Katherine Ross and outlined three things every retiree must know before they file their taxes in 2019. 

He says "If you're below full retirement age and you're earning income, social security will deduct $1 for ever $2 you earn above a certain threshold. For 2019, that threshold is $17,640. So, let's give you a for instance, if you are earning $20,000 that means you are $2,360 above the threshold... Social security will deduct $1,180 from your benefit leaving you with a net benefit of $820."

So, what happens if you are above retirement age and you keep working? Powell breaks it down in the video above.

Want More Tax advice?  Be sure to join our live webinar with our exclusive partners Turbo Tax. Be sure to join Turbo Tax's Lisa Greene-Lewis and TheStreet's Tracy Byrnes when they discuss 'The Most Overlooked Tax Deductions".  Catch it on TheStreet Live Friday, March 29, 2019 on

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