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When you signed off on your 1040 federal tax form recently, retirement was probably the last thing on your mind. Yet, by filing the 1040 for 1999, you have taken two important steps toward retiring.
First, you've cast in stone a number of decisions that will have an impact on your future finances, regardless of how close you are now to your golden years. The numbers you put on that form can serve as a reminder of how well you succeeded in building up your retirement nest egg over the last year.
Second, you've created what Todd Cleary, vice-president for financial planning at T. Rowe Price, calls "a gold mine of information" that you can use to inject some rationality to your retirement planning and saving in 2000.
Did you max out on your 401(k), that is, contribute the maximum extent allowable under your company plan? Did you skip contributing to an IRA in 1999 because cash was tight after you bought the new car? Are you paying capital gains on the tech stocks you sold high, or are you sheltering the gains in a tax-deferred retirement account? In other words, did you do the best you could to salt away money for your retirement? And if you're already retired, did you manage your income to maximum advantage?
If you missed the mark, don't fret. The 1999 tax year is now water under the bridge. But it's not too late to make sure you know about these retirement-related federal tax changes for 2000, so that if you qualify, you can take advantage of and plan for them:
Termination of Social Security earnings limit for beneficiaries ages 65 through 69: The government has repealed the rule that required millions of Social Security recipients to give up part of their benefit because they earned too much money from continuing to work. This change affects not only people who are already on Social Security but also those who are trying to decide how to time their retirement to generate the maximum income.
Retroactive to Jan. 1 of this year, the new law allows Social Security beneficiaries ages 65 through 69 to keep all of their benefits regardless of how much additional money they earn from work. If you've been having one of every three dollars you earned deducted from your Social Security benefit, you have just received a windfall. And if you have postponed going on Social Security because of the earnings penalty, now you can start thinking about signing up.
When you're deciding whether or how much to work after you "retire," remember this: Higher income means higher taxes, and maybe even a higher tax bracket.
Higher Social Security payroll tax: Workers with an income of $76,200 or more will have to shell out an additional $551 in payroll (FICA) taxes in 2000. In 1999, Uncle Sam claimed 15.3% of your earnings up to $72,600. This so-called maximum contribution increases annually according to a formula based on the average national wage. The $551 figure is based on paying 15.3% on the additional taxable base of $3,600.
Higher deductible contributions to your 401(k): Last year, the maximum deductible contribution was $10,000. In 2000, it's $10,500.
Increase in income limits for deductible IRA contributions: The deductible amount that you may contribute to a traditional IRA each year phases out as income increases. For 2000, the adjusted gross income limit for deducting the maximum contribution of $2000 to an IRA will increase from $61,000 to $62,000 for joint filers and from $41,000 to $42,000 for single taxpayers.
These tax changes for 2000 are just the beginning when it comes to retirement planning. In the long run, almost every financial option you consider for retirement will have tax implications. Take a look at Form 1040. Lines 15a, 16a, 20a, 23, and 29 on the first page all relate to current contributions to retirement accounts or to taxes on retirement income. The same is true of Lines 12 (self-employed business income), 13 (capital gains), and 17 (rental real estate). Here are just a few examples of other key retirement decisions that can have tax consequences:
Deductions: While you're working, you probably benefit from deductions on expenses such as your home mortgage, property taxes, and gifts to charity. But if your income goes down when you retire, will you need write-offs beyond the standard deduction (in 2000, $4,400 for an individual and $7,350 for joint filers)?
Selling your home: If you sell, you may qualify for a tax exclusion of up to $250,000 ($500,000 for a married couple) of the profit.
Health insurance: Retirees who are younger than 65 do not qualify for Medicare. Can you afford to pay for your own health insurance, and how much of that expense will you be able to deduct?
Retiring early: If you retire before age 59 1/2, you'll have to pay the IRS a 10% penalty for money you take out of tax-favored accounts such as a 401(k)or an IRA. Can you afford to retire early without tapping that money?
If you're at all concerned about your retirement finances, now's the time to integrate a tax perspective into all your retirement planning.
In 1789, when Ben Franklin said, "In this world nothing can be said to be certain except death and taxes," he was probably right. But in the 21st century, when the average lifespan is a lot longer than it was back then, if Ben were still around he'd probably amend that to read: "death, taxes, and retirement."
By Ellen Hoffman in Washington
Hoffman is author of two recent retirement books, Bankroll Your Future: How to Get the Most from the Government for Your Retirement (Newmarket Press, 1999), and The Retirement Catch-Up Guide: 54 Real-life Lessons to Boost Your Future Resources Now (Newmarket, 2000). She's becoming a regular contributor to Business Week Online, so watch for more. EDITED BY DOUGLAS HARBRECHT
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