Tax season is quickly approaching, and individuals who have retired cannot relax yet. Though a large number of retirees no longer play a part in the workforce, even those who are peacefully enjoying their retirement should be prepared to file their taxes come the new year. There are a few important things retirees should know about their taxes before it comes time to file them.
While it is advised that retirees prepare well in advance for tax season, it is not too late to get started on your taxes. In retirement, taxes can become stacked if you are not careful. To avoid this, you must be sure to withdrawal only certain amounts from accounts like your 401(k); failing to abide by this can result in up to 85% of your Social Security benefit being taxed as ordinary income. In order to avoid getting taxed more than you should be, engaging in tax planning as early as possible can help. Generally speaking, tax planning entails determining how you can owe less by being strategic with your finances.
Even if you are in good health, be sure to keep track of all your medical expenses throughout the year. With proper documentation, you may be eligible for reimbursement. This opportunity began in 2019, and individuals may be eligible for medical expenses that have not yet been reimbursed and exceed 10% of the individual’s adjusted gross income. You should be sure to include all medical expenses including things that are commonly overlooked such as eyeglasses, hearing aids, and medical equipment.
Giving to charities is a common activity of retirees, and retirees should be aware of how to make gifts and charitable donations benefit them when it is time to file their taxes. When giving to charity, retirees should consider doing so through Qualified Charitable Distribution (QCD) program which takes money directly from an individual’s IRA and pays it to the charity; this course of action results in a donation that is not taxable and still benefits the charity just as much as any other donation.
Retirement Account Withdrawals
After you reach the age of retirement, you are required to take minimum distributions from your accounts on an annual basis. Failing to do so results in tax penalties. Keep track of your withdrawals and be sure to take your minimum distributions each year, or else you will have to pay a 50% penalty on the amount you should have withdrawn.