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Retirement is supposed to be the golden years of relaxation and freedom, but for many, it comes with the unexpected stress of complex tax rules.

Imagine settling into your new routine as a retiree, excited about this new chapter of life, only to find yourself buried in tax forms and regulations you didn't even know existed. Even worse, it turns out that many of the simplest mistakes come with costly results and penalties that can eat into your hard-earned savings.

Don’t let those golden years turn brass. Read on to see the most common tax-related mistakes retirees often face and how you can take action to keep your retirement worry-free.

1. Disorganization → Penalties for Missing Deadlines and Underpaying!

Disorganization is a widespread issue among taxpayers, but it can be particularly detrimental for retirees. All of a sudden, you have different amounts of income coming from multiple sources — retirement accounts (some tax-deferred, some not), Social Security, investment income, possibly part-time work — and your taxes must correctly reflect all of them.

In other words, maintaining organized financial records is crucial.

Because underpaying your taxes (or paying them late) can come with hefty penalties plus interest, it’s better to develop a plan for tracking your income and expenses sooner rather than later. This will also give you time to work through any questions or sticking points while you have plenty of time to deal with them, as well as help you avoid feeling bogged down or overwhelmed come tax season.

Your best bet is to develop a systematic approach to your tax documents that you feel comfortable with. There are great digital tools and apps available that will help you store and organize your documents. Whether you do it every time you receive a tax-related document or bill or once a month, regularly update your financial records and set reminders for tax deadlines to avoid late fees and penalties.

Being organized not only simplifies the tax filing process but also ensures that you can take full advantage of any deductions and credits you are entitled to, ultimately saving you money and stress.

2. Not Understanding Retirement Account Taxation → Higher Taxes for No Reason!

Different retirement accounts have different tax implications, and determining which resource to draw from at which time can be overwhelming for retirees. For instance, withdrawing funds from a traditional IRA is taxed as ordinary income, whereas Roth IRA withdrawals are generally tax-free.

It's like thinking every type of fuel can go in every type of car. Will your car still start? Probably. Will it go very far? Probably not. And the long-term results can be potentially disastrous.

Misunderstanding these differences can lead to higher tax bills and even impact your Social Security and Medicare premiums. Josh Zimmelman, an accountant and managing director of Westwood Tax & Consulting, notes that incorrect withdrawals can result in needlessly higher capital gains taxes and increased Social Security taxes.

To avoid these issues, familiarize yourself with the tax rules of each retirement account type. Even better, consult with a financial advisor to strategize your withdrawals in a tax-efficient manner. This planning can help minimize your tax burden and prevent unexpected costs that could disrupt your retirement plans.

3. Failing to Take Required Distributions → Penalty on Money You Didn’t Spend!

Another reason you should familiarize yourself with the tax rules for each of your retirement accounts? Getting it wrong can come with — you guessed it! — major penalties.

For example, some retirement accounts require you to withdraw a certain amount once you hit 73, even if you’re still working or don’t “need” to pull from the account. If you don’t withdraw the mandatory amount by December 31, you’ll have to pay the IRS a 25% penalty on the money you didn’t withdraw. That’s right, a 25% penalty on money you didn’t even spend!

Of course, determining the mandatory amount you need to withdraw can be a headache on its own. The amount is based on your account balance and life expectancy, which can be calculated using IRS worksheets. You can also always get help from a tax professional or financial advisor.

To avoid this costly mistake, mark your calendar with important deadlines and ensure you understand how much you need to withdraw each year. Automating your withdrawals can also help ensure you never miss a deadline. By staying on top of these requirements, you can avoid unnecessary penalties and ensure your retirement funds are used as intended.

4. Confusion Around Itemizing Deductions → Paying More Tax Than You Should!

Should you itemize or take the standard deduction? It depends! But getting it wrong can mean leaving a lot of money on the table.

Currently, the standard deduction reduces your taxable income by $13,850 for a single filer and $27,700 for a married couple. For most taxpayers, that’s much more than all of their itemized deductions.

However, there are times when itemizing can lead to greater tax savings, like when you have high medical expenses — something many of us will see more of in our retirement years. In fact, according to many financial experts, medical costs are usually one of the three biggest expenses for retirees, and failing to take advantage of these potentially large deductions can result in paying more taxes than you have to.

The IRS lets you deduct all qualified unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). That means if you make $50,000, you’d need to have at least $3,750 in medical expenses before you can deduct any of it.

The best way to make sure you’re taking full advantage of all your eligible medical deductions is to start keeping records of all your medical-related expenses at the beginning of the year, including prescriptions, doctor visits, and long-term care costs.

Of course, medical costs aren’t the only deductions you can itemize. And sometimes, taking the standard deduction is still the better choice! For help understanding the benefits of itemizing versus taking the standard deduction and guidance making the most advantageous choice, consult a tax professional.

5. Incorrectly Calculating the Cost Basis for Sold Stocks → Overpaying Capital Gains!

Retirees sometimes miscalculate the cost basis of sold stocks, especially if they have held the stocks for a long time or have reinvested dividends, which can significantly impact your tax calculations. Getting this wrong can result in overpaying taxes — and even paying for a capital gain when you could be capturing a helpful loss.

Properly accounting for the cost basis of your investments is crucial for managing your retirement funds efficiently.

6. Not Reporting All Your Income → Potential Tax Surprise!

Yep, that even includes tax-free income, like municipal bond interest. Maybe you took on a side job or did a little gig work just to get some time out of the house. Whatever it is, if it’s income, you need to report it on your taxes.

If you underpay your estimated taxes by a certain amount, you can get hit with penalties. And not reporting tax-exempt income can affect how some of your other benefits, like Social Security, are taxed.

Either way, no one wants a surprise from the IRS. To make sure this doesn’t happen to you, always report all sources of income, including tax-free income. Understand how this income affects your overall tax situation, particularly regarding Social Security benefits. Keeping track of all income sources and consulting with a tax professional can help you manage your tax liabilities more effectively.

7. Taking Social Security Too Soon or Too Late → Low Monthly Payments for the Rest of Your Life! Missing Out on Some Benefits Completely!

The timing of when to start taking Social Security benefits is crucial and can significantly affect your retirement income.

Starting benefits too early can result in lower monthly payments for the rest of your life, while waiting too long can mean missing out on benefits you could have used.

The best time for you personally? It’s different for everyone and depends on factors such as your overall financial situation, health, and retirement goals. Before making this decision, you’ll want to assess your financial situation carefully. Consider using online calculators or consulting with a financial advisor to determine the optimal time to start receiving Social Security benefits. This planning can help maximize your benefits and ensure a more secure retirement.

Look, doing your taxes can be overwhelming with only a single W-2 form and maybe a few deductions and credits to claim. And yet retirees are expected to juggle multiple different income streams (some tax-deferred, some not), deadlines, benefits, and penalties — and if they get it wrong, it can have a serious impact on their financial picture, sometimes for life. And on top of everything, the rules frequently change.

But you don't have to navigate this complex landscape alone. Consulting with a tax professional or financial advisor can provide you with the guidance and support necessary to make smart financial decisions. They can help you stay on top of changes in tax laws, optimize your retirement income, and ensure you're taking full advantage of all available deductions and credits. And the cost of working with a qualified professional can often be offset by the money you’ll save in excess taxes and penalties.

In the end, the goal is to enjoy your retirement years to the fullest, free from the worry of unexpected tax issues. By staying informed and proactive, you can turn potential pitfalls into stepping stones toward a prosperous and stress-free retirement. Here's to making the most of your golden years, with peace of mind and financial security.