Using Your Tax Return As a Financial Roadmap in Retirement
JEANNE PYLE SCOTT, DIRECTOR, CPA, CTFA, CGMA
CENTENNIAL TAX & ACCOUNTING
Your completed tax return is more than a record of last year’s income—it can be a useful guide for making smarter decisions in retirement. A brief review of a few key Form 1040 lines can reveal opportunities to manage future taxes, improve cash flow, and coordinate withdrawals with your broader financial plan.
Start with adjusted gross income (AGI). AGI influences many tax outcomes in retirement, including the taxation of Social Security, Medicare premium surcharges, deduction phaseouts – including the new senior deduction, and eligibility for certain tax strategies. If your AGI was unusually high or low, ask what caused it: IRA withdrawals, capital gains, interest income, or one-time transactions. If your AGI is expected to remain low, it might be a good time to consider a Roth conversion.
Next, review your Social Security benefits. The taxable portion is based on provisional income, generally AGI plus tax-exempt interest and half of Social Security benefits. Depending on income levels, up to 85% of benefits may be taxable. If IRA withdrawals or capital gains pushed more benefits into taxable income, future planning may involve spreading income across years or drawing from taxable, tax-deferred, and Roth accounts more intentionally.
Your IRA and pension distribution lines are also important. Required minimum distributions generally begin at age 73 (age 75 for those born in 1960 or later). Delaying the first RMD until the following April can result in two RMDs in one tax year, potentially increasing taxes or affecting Social Security taxation. Years before RMDs begin may offer a “window” for partial Roth conversions—paying tax at known rates now to reduce future taxable withdrawals.
Review capital gains and losses on Schedule D. If you were in a lower tax bracket, some long-term capital gains may have qualified for the 0% federal rate. If you anticipate remaining in a lower tax bracket, this is a good opportunity to discuss strategic investment moves with your financial advisor. Loss carryovers may also help offset future gains.
Take a look at charitable giving. If you are age 70½ or older, qualified charitable distributions (QCDs) can be made directly from an IRA to charity, count toward RMDs, and are excluded from income, though no charitable deduction is allowed. Utilizing QCDs helps to keep your AGI down, which may help with other items as addressed above.
Lastly, compare total withholding and estimated payments to your tax due. Adjusting IRA withholding, Social Security withholding, or quarterly estimates can help reduce surprises next April.