Introduction to Avoiding Taxes at Retirement

Arthur Godfrey once said, "I’m proud to be paying taxes in the United States. The only thing is—I could be just as proud for half the money." For people coping with the fixed and often reduced income of retirement, taxes on income and assets can diminish their quality of life and cut heavily into the legacy they may wish to leave to their heirs.

The key to avoiding unnecessary taxes is understanding what kinds of things are taxed. It’s fairly straightforward when you are working—your salary or wages are taxed. There are federal and state income taxes, Social Security tax, Medicare tax, and a myriad of other payroll deductions that go toward paying this or that other tax. But what about in retirement?

You still need to worry about income taxes on your retirement income. You may or may not be subject to Social Security tax. Medicare tax will now be called a medical insurance premium. But you need to be careful about incurring tax penalties on your retirement income. And in the end, there might even be a tax on the estate you leave to your heirs.