I’m a Retiree: This Is How Much I Still Pay in Taxes Every Year Even in Retirement

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When you leave the office for the last time, you say goodbye to anxiety-inducing commutes, painfully long meetings and micromanaging supervisors. Unfortunately, some less-than-great aspects of life will linger on throughout your golden years — namely, taxes.

While you won’t contribute to the local, state and federal coffers via payroll taxes anymore, you’ll still have some tax liability. We spoke with a retiree who broke down his annual tax bill and offered ways to reduce your retirement taxes. Keep reading to see how to improve your financial situation after the paychecks stop hitting your bank account.

Meet Doug Nordman

Doug Nordman, co-author of Raising Your Money-Savvy Family For Next Generation Financial Independence, is 64 years old and lives with his wife in Central Oahu, Hawaii. He retired from the U.S. Navy’s submarine force in 2002 at age 41.

The Taxes Nordman Pays

Here’s how much the Nordmans pay in taxes each year:

• Military pension: $11,600 in federal taxes (no state taxes)
• Property: $4,500 on the primary residence and $3,600 on the rental property
• Investments: $6,500 on net rental property income and $2,100 state excise on gross rental income

Hawaii is perceived to be a costly place to live — and it can be.

“Our property taxes have risen over 25% in the last few years due to booming prices in our local real estate,” Nordman said. However, the state’s “property taxes are among the lowest in the nation at 0.35% for primary residences and about 0.45% for rental properties,” he continued. 

Plus, “Hawaii used to have the nation’s highest combination of income taxes plus excise taxes, but this year, the legislature passed the largest tax cut in the state’s history. It greatly reduces taxes on lower-income families and will gradually ease our tax bill over the next seven years,” Nordman said.

While Nordman must pay taxes on his rental property income, he’s currently paying zero tax on the interest and dividends he receives.

“Most of our retirement assets are in our Roth IRAs. Now that we’re older than 59 1/2, we can adjust our taxable investment income by withdrawing from our IRAs and our joint brokerage account in a tax-efficient combination,” he explained.

Well, what about Social Security income? Nordman and his wife aren’t collecting yet.

“We’re starting our deposits in 2031 at age 70, and we have relatively low earnings records,” Nordman said. He expects they’ll pay around $12,500 (in today’s dollars) in taxes on that income when the time comes.

How Nordman Reduces His Tax Bill

“We’ve planned for these taxes, so we don’t struggle to pay them,” Nordman said. “[However,] we occasionally disagree with how our tax dollars are spent, and we’re perpetually reluctant to give our governments more of our money for their spending. We focus our attention on minimizing our tax bill when it makes sense.”

For instance, “We invest in tax-efficient index funds with small qualified dividends (taxed at capital gains rates), and we rarely sell shares,” Nordman said.

Nordman also offsets part of his federal tax bill by claiming tax credits for energy improvements made to his home, such as installing a solar power system. In addition, he and his wife make large charitable donations to their local foodbank and the Fisher House Foundation, which they can write off on their tax return.

How To Reduce Your Tax Liability

Nordman offered these tips to help you lower your tax bill:

• Invest in passively managed index funds with low expense ratios. “The less you trade, the less you’ll be taxed on the growth of the shares,” Nordman said. 
• Take advantage of credits or deductions for your primary residence (if you’re a homeowner).
• Keep tabs on your home’s value and challenge the property tax assessment if the tax authority overvalues your residence. Make sure you’re paying the correct tax rates.
• Make energy-efficient home improvements. You can find information about current programs online through your state government, utility company and the Database of State Incentives for Renewables & Efficiency®.

“Our best advice for retirees is learning more about how you’re taxed. Either do your own income-tax returns or work with a tax professional who’ll show you how to reduce the taxes on your future spending and investing. Our daughter works part-time as a paraplanner for a financial advisor, and we talk about taxes nearly every week,” Nordman said.

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