Retirement is a time when you are supposed to take things easier, but this does not give you a free pass in the eyes of the Internal Revenue Service (IRS). Quite a few individuals who reach retirement age are surprised at all the retirement bookkeeping they suddenly start to find themselves doing, and this has a lot to do with financial changes in their lifestyles. In the past, you probably felt that steady paychecks were the cure to all financial issues; perhaps you even had the means to generate extra cash when needed, but things are different now that you have to rely on fixed retirement income.
Retirement bookkeeping is something you quickly learn to appreciate once you retire, but there is more to just keeping a budget when it comes to accounting for retired professionals. Retirement financial advisers notice that retirees tend to make mistakes in terms of taxation, and this can bring about some unpleasant surprises.
Here are some of the most common mistakes to avoid:
Ignoring Property Tax Breaks
Any retirement CPA will tell you that homestead exemptions geared towards retirees often go ignored. Some states impose a cap on property assessments for homeowners over the age of 65 while other states provide substantial deductions.
Tax Filing Mistakes
Along with incorrect bank account numbers and clerical mistakes, the IRS reports that quite a few taxpayers overlook errors related to simple math such as adding and subtracting dollar amounts. For many retirees, math skills tend to decline with age, and this is why many retain an accountant for retirement to help them with tax filing.
Missing Out On Medical Expense Deductions
Things can get complicated when it comes to figuring out how much you can deduct from healthcare expenses. According to many retirement financial advisers, the Affordable Care Act introduced new intricacies to the tax filing process for seniors, and the 10% rule of deductions above the annual income does not apply to everything. Deducting medical expenses requires full itemization, and this is a task that is better left to a retirement CPA or tax preparation professional.
Collecting Social Security Before It Makes Financial Sense
There is no common practice on the issue of when you should start taking the monetary portion of your Social Security pension; in other words, just because your neighbor started collecting at the age of 62 does not mean you should file for this benefit at the same age. Social Security income is currently subject to taxation, and there is a strong chance that this will continue in 2020 and beyond. At the same time, waiting until full retirement age does not make sense if you anticipate financial hardships in the meantime.
Charitable Gifts & Donations
When your Individual Retirement Account is providing more than enough to cover your living expenses, you have a good incentive to donate to charity for the purpose of lowering your tax burden. Charitable gifts make sense for taxpayers who earn active incomes, but they can be even more beneficial, at least up to $100,000, for retirees.
Using Retirement Savings To Pay Off A Mortgage
Getting rid of those pesky monthly mortgage payments will seem tempting to many retirees, but the retirement CFO advisory on this specific matter is to keep in mind that the IRS will look at every dollar used to pay off the remaining balance of your home loan. If you have a single source of retirement income, let’s say one 401(k) account, paying off your mortgage right away could result in expensive taxation. As you can see, working with a retirement accountant could be one of the best financial decisions you make.
At Fusion CPA, we offer specialized services for retired professionals. This list of taxation mistakes is not all-inclusive and there are other mistakes you will want to avoid so that you can truly enjoy your retirement.
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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.