Sunday, March 13, 2011

How I retired and kept on working, part II: Taxes

Readers of sixtyandsingle.com know that a year ago I left my salaried job as a business editor of my hometown newspaper where I worked for 26 years. Since then I've put hours (and more hours) into getting my financial feet on the ground as a retired person who would like to supplement my income with part-time work as a writer and workshop facilitator and presenter. (Oh yeah I want to grow mushrooms and sell them at a farmers market. But that's another story).
When I had a job, checking a few boxes once a year regarding my federal tax withholding and how much I wanted saved into my 401(k) was all I had to do. That changes when you retire. There's a lot more paper work related to income and taxes. As 60 & single Baby Boomers make the transition from wage earners to retirees, here are a few tips:
  • - Keep accurate records of any freelance and other income as well as related expenses. That's because when tax time comes around you will need to explain it all to the IRS on your federal tax return and to Social Security. Believe me there are lots of tax rules for what's an expense and what isn't. There are rules for what you can claim and what you can't, what's deductible, what's not.
  • - As a self-employed retired person, you no longer have an employer who is withholding your estimated federal taxes. Retirees face IRS penalties unless they pay estimated quarterly income tax. Those tax payments must be equivalent to 90 percent of what you likely owe in any given year. The IRS gives you a worksheet to help figure it out at http://www.irs.gov/.
  • - It's important to under stand the rules for taking Social Security benefits before your full retirement age. In January at age 64, I began collecting benefits even though I have not yet reached full-retirement, which for me is age 66. In order to avoid levies against those benefits, I must make sure my earned income stays below a certain amount. Otherwise Social Security wants money back at a rate of $1 deducted for every $2 earned. The good news is that (unearned) income from 401(k) investments, interest payments, annuities or capital gains do not count against earnings. The agency offers detailed information for how this works at its Web site http://www.socialsecurity.gov./ Click on "If you work and get benefits at the same time."
OK I get it. Be organized, keep good records, watch my budget and don't earn too much until I'm 66. At full retirement age, Social Security doesn't care how much you earn.
Doing your taxes
Having just completed my federal tax return, my advice is to look at the whole retirement thing as a "fun" challenge. It's kind of like playing "Angry Birds" where (after many attempts) you master a level of castle-crushing strategy, only to move on to the next.
The IRS doesn't make it easy, particularly this year when it decided to NOT send out paper 1040 information, schedules and forms by mail. Sure it saves money, ($11 million?), but those of us who like to do our own taxes must make repeated trips to the Internet to search http://www.irs.gov/ for information, then print out the stuff. It's a waste of time and printer ink. Unfortunately, the IRS Web site search box is near worthless, the home page is cluttered and much of the data is out of date. Searches can be lengthy.
The actual forms are daunting. At one point, I thought I could write-off my expenses related to a home office where I do all my work. The tax worksheet sounded straight-forward: "Expenses for Business Use of Your Home." But figuring out the deduction was so complicated that after getting to line 15 of a 30-line process, I gave up. I hate to be defeated, but I was.
As more Baby Boomers like me make the move to semi-retirement, I'm betting that the IRS will hear from us regarding the needless complexity of reporting self-employment taxes and deductible expenses, and about the confusing and inconvenient process of finding out what you need to know. Why not offer an IRS Internet home page that starts out with simple categories: Individual, employed; individual, self-employed; small business, corporation.
A click on one of these categories takes you to a list of forms and schedules needed by that type of taxpayer. The tax forms and schedules would be labeled not by code number or letter, but by TOPIC. For example, Schedule B becomes "Interest and Ordinary Dividends" work sheet. Form 8283 becomes "Noncash Charitable Contributions" report. Schedule A becomes "Itemized Deductions" worksheet. As it is, you've got to know the code for the form or schedule before you can find it at irs.gov.  A glossary of easy to understand terms would help... with links to those forms and schedules.
After this year's struggle, I have become convinced that the IRS does not want people doing their own taxes. Again we -- especially 60 and single women -- are being told that it's too complicated. That it takes an expert. Just pay someone or buy software. Hogwash!
Hey, it shouldn't be that difficult or cost that much to be retired or self-employed. People on fixed incomes, people who have been laid off and started their own home-based small business can't afford a $300 CPA or even a $50 piece of software. Let's face it, this country needs serious TAX REFORM. Click here for a recent tax reform presentation to a Congressional committee as reported by businessinsider.com.
But I digress.
I honestly like the challenge of doing my own taxes. It was a good thing (now that I'm retired) that I had more time to spend doing them. I now know what I'll be paying in quarterly estimated taxes this year and likely what I'll be paying in 2012. That gives me piece of mind in terms of budgeting. It gives me least as much peace of mind as you can have in these interesting economist times.
I truly believe that to be fully engaged in life, you've got to be engaged with your money. The IRS should make paying taxes easy enough for anyone with a basic high school education to do their own.
To read my Retired but working, Part I post, check out my item from Feb. 3, 2011
More on tax reform, click here.
Click here for a PBS report on corporate tax reform.
Americans for Tax Reform.
Obama mulls tax reform, click here
File your own taxes, tips click here.
Congress: "Do Your Own Taxes" by Joseph Thorndike at Huffingtonpost.com
Five Reasons Why You Should Do Your Own Taxes, click here.
"Taking on your 2010 tax returns, at Fidelity Investments.

From SixtyandSingle.com:
http://www.sixtyandsingle.com/2011/02/why-part-time-work-makes-sense-for.html

No comments:

Post a Comment