With careful planning and preparation, retirement is a dream that is within reach. But for some, lack of planning or mismanagement can make that dream less than ideal. Among the concerns of many retirees are taxes. With the expertise at Cook Martin Poulson, we can help you manage your assets and prevent paying tax unnecessarily.
One of the most frequently asked question is:
What is the best way to handle Utah taxes for retirees?
How Retirement Taxes are Calculated
One of the most common misconceptions about paying taxes in retirement is the difference in how taxes are calculated once you stop working. Which is not the case. Although there are some types of income are not taxed.
Income that may be taxed after retirement includes:
- Social Security
- Investment funds
- IRA and 401(k) withdrawals
- Annuity funds
- Capital gains from the sale of your home
This may seem like a lot, but the good news is that there are ways to manage your income to minimize your tax burden in retirement.
Is Utah Tax-Friendly for Retirees?
What about Utah taxes for retirees? The laws regarding taxes for retirees vary from state to state, so here’s what you need to know about Utah.
Utah is considered a moderately tax-friendly state for retirees. However, there are some rules that retirees consider a disadvantage. For example, Utah income tax rules tend to be less friendly than in other states.
On the flip side, property taxes and the sales tax in Utah are low compared to the national average. Best of all, there is no inheritance or estate tax in Utah, which can be advantageous for retirees.
Is Social Security Taxable in Utah?
The issue of Social Security is a concern, particularly for retirees who don’t have significant investment and retirement accounts.
Social Security income that is included in the Adjusted Gross Income (AGI) on your tax return is taxable in Utah. Utah has a flat income tax rate of 4.95%, so this is the rate you will pay on any eligible Social Security income.
Thanks to the Utah Retirement Tax Credit the sting of paying taxes on Social Security income may be less. Credits and deductions, reduce your taxable income and will help you minimize your tax burden in retirement.
Are Other Forms of Retirement Income Taxable in Utah?
Social Security income isn’t the only kind of income you can rely on in retirement. Some other forms of retirement income that are taxable in Utah include:
- Simple IRAs
- Traditional IRAs
- 401(k) accounts
- 403(b) accounts
On the other hand, if you choose a Roth IRA, you will pay taxes before you contribute and will not pay them when you withdraw money in retirement.
Who Can Take the Utah Retirement Tax Credit?
The primary tax credit that applies to Utah retirees is the Utah Retirement Tax Credit. This is a credit of up to $450 that you may take on your Utah state tax return to reduce your taxable income in retirement.
If you are married and filing a joint return, you may be eligible to deduct $450 for you and an additional $450 for your spouse. Retirees under the age of 65 are capped at a $288 credit.
It is good to be aware that there are income limits that apply to how much of the credit you can receive. The credit drops by 2.5 cents for each dollar of annual income over:
- $25,000 for single people
- $32,000 for married filing jointly
The bad news for high earners is that they may not be eligible for the credit at all. You can calculate your eligibility using Form TC-40C.
Retirement Tax Changes in the CARES Act
The Coronavirus Aid, Relief and Economic Security Act (CARES) was signed into law in March 2020 as an economic stimulus package to help individuals and businesses impacted by the COVID-19 pandemic. There are several provisions in the CARES Act that affect retirement taxes.
- Required minimum distributions from retirement accounts, including 401(k), 403(b) and 457(b) accounts, have been suspended for 2020. There is no make-up required, meaning that you will not be required to take two distributions in 2021.
- 401(k) participants may take out loans of up to 100% of their vested balance. (The usual limit is $50,000).
- 401(k) participants have an extra year to pay back loans they took out before the CARES Act. If 2020 is one of your five repayment years, you are not required to make payments this year if you cannot afford to do so. (In other words, you effectively have a six-year term to repay your loan instead of the usual five years).
- Retirement account withdrawals up to $100,000 made as the result of a COVID-19 diagnosis for you or your spouse will be exempt from the usual 10% penalties. You may also take a loan from your IRA. (IRAs do not typically allow loans).
- Self-employed people may defer the employer portion of their Social Security tax payment (taxes owed from March 27, 2020 through December 31, 2020) until December 31, 2021. They will still need to be paid, so this is a deferment, not a waiver.
- The CARES Act created a new above-the-line tax deduction of $300 for charitable donations from your retirement accounts.
- You can still make a qualified charitable contribution from your retirement account up to $100,000, even if you choose not to take your RMD for the year.
- You can make a cash gift to a public charity of up to 100% of your adjusted gross income. The usual limit is 60% of AGI.
These changes were designed to make it easier for retirees to manage their money during the pandemic.
Tax Strategies for Retirement Income
The most important thing you need to know about Utah taxes for retirees are the strategies you can use to minimize your tax burden. Here are our recommendations:
- If you can afford to do so – and especially if your retirement account has lost money due to stock market fluctuations – do not take your RMD in 2020. This one move allows your investments to rebound and leave more money in your account to earn returns.
- Use Form TC-40C to calculate your Utah Retirement Tax Credit and ensure you take the full amount you are entitled to receive.
- Convert from a Traditional IRA to a Roth IRA. While the conversion itself is a taxable event, since contributions to a Traditional IRA are made pre-tax, you’ll save money in retirement because you will not be taxed on the withdrawals you make. Any earnings on your Roth IRA investments are tax-free, as well.
- Manage your assets according to their tax status. That means if you have a Roth IRA, you can be aggressive with investments because it grows tax-free and may be withdrawn (or the money may be given away) tax-free as well. Additionally, your traditional (pre-tax) investments should be actively managed, and your trust account should be used for long-term investments.
- Make sure to maximize the tax benefits of your charitable contributions by considering a family foundation or a donor-advised fund.
- Use any losses on the sale of annuities or bonds to offset your capital gains.
- Remember that excess capital loss may be used to offset up to $3,000 of ordinary income.
- Work with an experienced CPA to review your income, investments, and taxes to choose the best strategies that will make your retirement income stretch the farthest.
The decisions and actions you take with your money now, can have a significant impact on how much money you have later. With the information and strategies we’ve listed here, we will help you navigate the tax laws to help you enjoy what you have worked your entire life for, retirement!
Cook Martin Poulson’s Utah income tax service is the place to turn if you need assistance with your retirement planning. We look forward to hearing from you!