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 become noticeably different when you have to rely on fixed retirement income.

Due to a lack of financial knowledge, many retirees make costly taxation mistakes that can significantly impact their retirement savings.

This is where retirement bookkeeping comes in handy. Financial advisers that specialize in retirement often 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:

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. This is in addition to the fact that many retirees often underestimate their tax liability which could leave them in shock when they file retirement taxes. Having a retirement accountant take care of your tax filing helps to mitigate this, as they implement accounting software to help identify errors.

Failing to Plan for Required Minimum Distributions

You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 72, regardless of whether you are still working.  Failing to take these distributions can result in penalty payments which could cut into your retirement money, unnecessarily. However, IRA distributions may be fully or partially taxable; and in some cases, they may not be taxable at all. It is important to consult with an expert to help you plan for these distributions and to help you reduce your tax liability on them.

Ignoring Tax Breaks

There are a number of tax credits that citizens older than 65 years can become eligible for. These include:

  • Property tax breaks in some states: You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. Certain states impose a cap on property assessments for homeowners over the age of 65 while other states allow for deductions. Consult your CPA to find out if you qualify for age-specific tax breaks on property sales or maintenance thereof.
  • Medical expense deductions: You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependent(s) if you itemize your deductions on Schedule A (Form 1040). Deducting medical expenses requires full itemization, and this is a task that is better left to a retirement CPA or tax preparation professional.
  • Charitable gifts and 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. 

Collecting Social Security Before It Makes Financial Sense

Social security benefits include monthly retirement, survivor, and disability benefits. They don’t include supplemental security income (SSI) payments, which aren’t taxable.

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. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status. It is advisable to consult with your accountant to have a holistic view of your financial portfolio before deciding to claim your Social Security pension, as this amount may push your total bracket up and cause hefty taxation liability.

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.

Accounting Tips: Don't Make These Taxation Mistakes When You Retire

Working with a retirement accountant could help you make smart financial decisions to save your retirement savings jar some unnecessary tax duties. It will be one of the best financial decisions you make as a retiree.

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. You can learn more about our services by clicking the button below to schedule a complimentary Discovery Call today!

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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.