Are you approaching retirement? This is an important time as you transition from working life to using your retirement assets. And one person you should have on your team during this life-changing event is an experienced tax preparer. Why? Here are three key reasons.
1. Tax Forms Change
No matter what your source of income, some parts of the tax filing process remain the same. Others will be very different. As a retiree, you will begin to receive new forms, including new types of Forms 1099 as well as necessary statements from brokerage companies.
Do you know what to do with these new forms or how they affect your main Form 1040? If not, consult with your preparer about what forms you will begin receiving and what is done with each of them when filing.
2. Tax Rules Change
When your income comes from tax-advantaged accounts, there are some new rules you'll need to follow. You will, for example, need to withdraw funds from 401(k) accounts on a schedule in order to avoid penalties. Social Security income may be subject to different levels of taxation based on your other income. And the money made from consulting or freelancing may need to be reported differently than wages.
The IRS also changes these rules and thresholds annually — sometimes creating confusion that must be clarified at later times. Even a savvy, seasoned taxpayer will find it difficult to keep abreast of tax rules.
3. Tax Planning Changes
With different rules and new sources of income, the way you need to plan for taxation changes as well. For instance, if a certain level of withdrawals from retirement accounts would cause your Social Security benefits to be taxed, you may want to lower withdrawals. You may choose to accelerate or delay certain withdrawals to avoid raising your tax rate. Or you might be considering moving to states with lower tax rates.
Tax planning moves must be made well in advance, so you should meet with a preparer regularly even before you actually retire. Once you know your target date, plan for one or two additional consultations each year until you know how retirement will affect your finances.
As you retire, you surely want to enjoy a simpler and more stress-free life. But attempting to handle your own income taxes without professional assistance may cause your life to become the opposite. Instead, make an appointment today to meet with a qualified tax preparation service today like Hough & Co CPA, so you can start out this new chapter on the best foot possible.