Nobody likes having to pay taxes throughout their careers, but it is one of the two certainties in life. The other certainty in life is less pleasant than having to pay taxes because it is the end of life itself.
Paying taxes is a necessary part of life. Of course, that does not mean that you should pay more than you need to, especially as a retiree. While most people look forward to enjoying their retired life, the Internal Revenue Services (IRS) is still there and eager to make life slightly inconvenient for you.
Assuming that you still have some form of income, your tax planning will not end after you enter retired life. The IRS expects you to pay taxes on your retirement income. If you have worked hard throughout your career and prepared your retirement plan to maintain your standard of living, you might find that your tax bills are similar to when you were working full time. Some people can even find themselves paying more taxes than they did before they retired!
Are you wondering how you can make the most of your retirement investments and keep more of your hard-earned money from being taken away through taxes?
The best thing you can do is take the time out for proper tax planning to avoid making retirement income tax mistakes that can cost you a lot more money than you should be paying in taxes. Making efficient tax moves can help you enjoy more of your retirement income without worrying about running out of your money before you can fully enjoy your retired life.
We will discuss some of the retirement tax planning mistakes that could end up ruining your financial security so that you can understand how to avoid them and make the most of your retirement.
4 Tax Mistakes To Avoid In Retirement
Here are the costliest retirement tax planning mistakes that you should avoid to ensure that you can enjoy your retirement with the financial security you have worked so hard for all these years.
1. Thinking that your taxes will automatically reduce in retirement
Perhaps the biggest tax mistake you can make in your retirement is to assume that the taxes you owe have to be lower when you leave the workforce. The people who do have to pay lower amounts in taxes during their retirement do so by simply earning lower retirement income, something that many might not consider an ideal retired life.
If you have saved a significant amount of money in a tax-deferred retirement account like a 401(k) or IRA Roth account, you should remember that it is a tax-deferred account, not a tax-free account. When you withdraw money from your retirement accounts, you will have to pay taxes on them. If the tax rates increase, you may have to pay similar or even higher taxes in retirement.
2. Not planning for taxes on your Social Security benefits
Social Security income can be taxed by the IRS. People with retirement accounts should know that their income from them counts as part of their provisional income. The distributions from these accounts are also added to the 1099 forms you receive from any taxable investment and to one-half of your Social Security benefits for the year.
You should consider consulting with a financial planner to determine whether your Social Security benefits will become taxable based on your income. A tax resolution specialist can work with you to determine how to minimize the taxes on your Social Security benefits.
3. Ignoring taxes entirely
Have you ever taken a look at a retirement calculator or any other projection and thought that you could easily live off that amount as your retirement income? You should know that the retirement income estimate you received was before taxes were deducted from the amount. If you are still a few years away from your retirement, you can still address the mistake and make appropriate financial decisions.
If you’ve already retired, you will need to put in a lot of effort to make up for the difference. Working with a financial planner can help you make the right decisions to address the problem.
4. Having no strategy to minimize your taxes
Being proactive about your tax planning can make a world of difference in how much of your retirement income you can enjoy without having to pay a large chunk to the IRS in taxes. Consider working with a qualified tax professional and financial planner who can help you create a strategy to reduce your taxes.
Using Professional Help To Avoid Tax Mistakes
Preparing your tax return is not a pleasant experience, especially when you have retired. If you make any of these annoying mistakes, things only feel a lot worse. Some tax mistakes might put a hold on your tax refund until things get sorted out. Other tax mistakes could lead to you paying way more in taxes than you should. The worst-case scenario is doing something so horribly wrong that the IRS comes knocking for an audit. For someone trying to live peacefully in their retirement years, it can be the most annoying thing in the world.
Sometimes, it pays to pay a professional, especially when it comes to tax season as a retiree. Consider enlisting the help of a tax resolution specialist to complete your tax return for you, especially if you are a retiree and your financial situation is complex. A tax resolution specialist is someone who makes a living by helping people and businesses with their taxes. You can rest assured that they are well-equipped to help you make significant savings on your tax bills and avoid making costly tax mistakes.
Polston Tax is a firm licensed to practice in all 50 states as tax attorneys. With hundreds of professionals in their ranks specializing in all areas of the tax industry, you can rely on their team to provide you the help you need with great effect. The right tax solution providers who are skilled in dealing with complex tax issues can help you maximize your tax savings while making sure that everything goes through clean.