Retirement income is much the same as income that you earn from wages on a job, as far as the Internal Revenue Service is concerned. Generally, you must pay taxes on your income, regardless of whether you are retired, although there are a few exceptions. The best way to calculate your taxable retirement income is to figure your total income and subtract any tax-exempt income or other money that may or may not be taxed, such as Social Security.
1. Gather all of your income statements relevant to your retirement income. Include interest-bearing bank accounts, stocks, bonds, rental property and all other sources of income. In addition, gather statements that reflect the amount of money you have in IRAs and other retirement accounts.
2. Figure out whether your Social Security benefits count as taxable income. Add up all sources of income, including tax-exempt interest, and then add 50 percent of your annual Social Security benefits to that amount. Compare the total to the IRS base amount. For the 2010 tax year, for example, the base amount for a married couple was $32,000 and for most other taxpayers, it was $25,000. If your total from the preceding calculation exceeds that amount, at least some of your Social Security income will be taxable.
3. Calculate your modified adjusted gross income (MAGI) using the worksheet included with IRS Form 1040 or 1040A. You’ll need to add up your income and qualifying deductions to determine your MAGI. The result indicates the amount of your retirement income that is taxable.
- If you have a Roth IRA or a Roth 401k, your contributions were made with after-tax dollars. Roth accounts earn money during your working years, and when you retire, you can make tax-free withdrawals. This makes Roth accounts very attractive to some people and a definite plus at retirement time.
- Even though some of your retirement income is tax-exempt (such as Roth IRA withdrawals), it may be included in your earnings when calculating the taxable portion of your Social Security benefits.
Items you will need
- Income statements
- IRS Form 1040
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