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How Your Taxes Can Change as You Get Older – As Featured in Peak NV Magazine

Retirement is the thrilling start to a new stage in life. However, with all the new and exciting changes coming your way the last thing you want to worry about is the change to your finances. Understanding how taxes can evolve during these years is crucial for making the most of your retirement income and staying financially secure. Here are some key points to keep in mind for your peace of mind:

State Taxes

Residents of Nevada can consider themselves very lucky as the tax benefits that make Nevada such a great place to live and work continue into retirement. In Nevada, there are no state taxes on:

 

With all that being said, federal taxes or some out of state taxes may still apply.

Federal Taxes:

1. Social Security: If your total income falls below $25,000 (or $32,000 for married couples filing jointly), your Social Security payments will likely not be subject to federal income tax. However, if your income ranges from $25,000 to $34,000 (or $32,000 to $44,000 for joint filers), up to 50% of your Social Security benefits may be taxed as ordinary income. If your income exceeds these thresholds, up to 85% of your Social Security benefits could be taxable.

 

2. Pension Income: The federal government generally taxes pension payments as ordinary income, but this is not always the case if contributions to your pension were made with after-tax dollars. You should also be aware that any pension or annuity payments you receive before the age of 59½ will likely face an additional 10% early withdrawal tax unless you are able to qualify for an exception. 

 

3. Withdrawals from Retirement Accounts: Contributions to a 401(k) are made on a pre-tax basis, meaning they are deducted from your paycheck before income taxes are applied. This lowers your taxable income, providing a tax deduction upfront. However, withdrawals during retirement, which can typically begin penalty-free from age 59½ onwards, are taxed based on your income tax rate at that time.

Conversely, contributions to a Roth IRA are not tax-deductible. However, once you reach age 59½ and your account has been open for at least five years, both your contributions and any earnings can be withdrawn tax-free. This tax-free withdrawal feature makes Roth IRAs advantageous for those anticipating higher tax rates in retirement or seeking tax diversification in their retirement portfolio.

 

4. Required Minimum Distributions (RMDs): Starting at age 73, mandatory withdrawals from traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, and other similar retirement accounts must be done every year. These withdrawals ensure that the IRS begins to collect taxes on the funds that have been growing tax-deferred within these retirement accounts. RMD amounts are calculated based on life expectancy and account balances, and failure to withdraw the required amount can result in significant penalties.

 

5. Estate Planning Considerations: An estate may be subject to estate taxes if its value at death exceeds the lifetime gift and estate tax exemption. For 2024, this exemption is set at $13.61 million. Estate taxes are based on the fair market value (FMV) of assets at the time of the deceased’s death, not their original purchase price. This means any appreciation in asset values over time may be subject to taxation. Assets left to a surviving spouse are generally exempt from taxes, however, when the surviving spouse passes away, beneficiaries may face estate taxes if that estate exceeds the estate tax exemption. The current estate tax exemption is set to decrease to $5.49 million (adjusted for inflation) after 2025 so it is important for estates exceeding that threshold to take advantage of the current increased exemption before the end of 2025. 

 

Understanding these changes is crucial for effective financial planning and maximizing available tax benefits. Whether it’s adjusting to retirement income strategies or planning for estate taxes, staying informed about tax implications at each stage of life ensures informed decision-making and financial security in the long run.

 

 

Erika Hoppe joined Barnard Vogler & Co. in 2014 as a staff accountant and has steadily moved up in the firm.  In 2024, Erika was promoted to Director.  She has a wide range of experience in individual, business and trust taxation.  She now focuses on tax engagements for high net-worth individuals, trusts and estates. Hoppe is a member of the Nevada Society of Certified Public Accountants, American Institute of Certified Public Accountants and Estate Planning Council of Northern Nevada. She earned a bachelor’s degree in criminal justice from the University of Nevada and received her Juris Doctor from the University of Iowa.

To read this article in Peak NV Magazine, check it out here.






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