Paying Taxes in Retirement

The current high rate of inflation will help some Medicare enrollees avoid surcharges, since the bracket definitions are adjusted annually for inflation. “It does look like we’ll have fewer people paying the surcharges,” said Ron Mastrogiovanni, chief executive of HealthView Services, a Boston-area maker of health care cost-projection software.

The two-year lag effect can create unpleasant surprises when you first enroll in Medicare. It is possible to appeal premium surcharges if your income declined owing to any one of a number of defined “life-changing” circumstances — and one of those is stopping work. File your appeal using Form SSA-44 from the Social Security Administration.

State taxes

Many states exempt retirement income, although the specifics vary widely. Eight states have no personal income tax, but among those that do, about three-quarters fully exempt Social Security benefits from taxation, and most others have partial exemptions for lower-income retirees, according to research by the Institute on Taxation and Economic Policy, a nonpartisan nonprofit group. Many states also have partial or full exemptions for pension income, and extra personal exemptions or reductions.

“It’s very common for some part of pension income to be exempted at the state level,” said Aidan Davis, the group’s acting state policy director. “And we’re seeing a major trend this year with more states cutting taxes for retirees,” she added.

Strategies for tax efficiency

Careful planning before retirement can help minimize or even avoid some of the knock-on effects that taxes on Social Security and Medicare surcharges can create. The objective is to reduce taxable income wherever possible by diversifying your holdings outside tax-deferred accounts.

Saving for retirement in a Roth I.R.A., or a Roth 401(k) offers one path to achieve this goal, as can Roth conversions, especially in the early years of retirement before you claim Social Security.

For workers enrolled in high-deductible health insurance plans, a Health Savings Account can help. These accounts can be used to pay out-of-pocket health care costs in retirement; contributions are tax-deductible, and investment growth and interest are tax-exempt, as are withdrawals spent on qualified medical expenses. Contributions to these accounts generally must stop six months before your Medicare enrollment becomes effective.

Article source: https://www.nytimes.com/2022/03/25/business/retirement-taxes-social-security.html