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If your retirement is not far off, you’ve probably already started to estimate what your living expenses will be after the regular paychecks stop. Most would-be retirees remember to include routine expenses like housing (rent or mortgage), medical bills and prescriptions, insurance premiums, transportation — even food and entertainment.
But don’t forget to factor in taxes, which can have a substantial impact on your cost of living, depending on where you live and what your sources of retirement income will be.
Here are a few tax-related issues to consider when budgeting for retirement:
Social Security. Most people can begin collecting Social Security benefits as early as age 62, albeit at significantly reduced amounts than waiting until their full retirement age (65 for those born before 1938 and gradually increasing to 67 for those born in 1960 or later).
Although many states don’t tax Social Security benefits, the federal government does.
Depending on your “combined income” (adjusted gross income plus nontaxable interest earned plus half of your Social Security benefits), you could end up owing federal income tax on a portion of your benefit. It’s complicated, but basically:
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