5 Potential Tax Pitfalls That Could Affect Your Retirement

Once you retire, many areas of life will become much simpler: No more work commute, career wardrobe, boring meetings, and hectic schedule! Hopefully retirement will feel like smooth sailing by comparison to your working years. However, one area of life might feel more complicated, at least at first… Watch out for these five income tax pitfalls, which are common amongst retirees.

You’re retired, but your spouse is still working (or vice versa). Make sure you fill out that W-4 form correctly, or you might underpay your income taxes throughout the year. This situation can also occur if you’ve retired, but are working part-time to stay active or earn income.

Your healthcare subsidy wasn’t calculated correctly. Some retirees have chosen to retire before they’re eligible for Medicare (age 65) and have enrolled in a federally subsidized healthcare plan instead. This is certainly an option, but remember those subsidies are calculated based on your income for the year. If you earned more than expected, for example by taking a larger distribution from your retirement account than you had planned, then your subsidy might have been overestimated… And you might owe Uncle Sam when you file your taxes.

You withdrew money from your retirement account too early. Occasionally, we’re forced to retire earlier than we had planned, due to health conditions or other circumstances. If you took your first retirement account distribution before age 59 ½, you might owe a 10 percent penalty on that money at tax time. However, there are some exceptions to this penalty: If you were forced to retire early due to disability, or if you withdrew the money to cover excessive medical bills above 7.5 percent of your income, the penalty won’t apply.

You took your first withdrawal too late. If you’re using a qualified retirement account, you must take your first withdrawal by the time you turn age 70 ½. Otherwise you could owe a stiff penalty to the IRS, in the amount of 50 percent of the withdrawal you should have taken. Don’t forget!

Overlooking important tax deductions and credits. Since your tax situation can change after retirement, work with a skilled tax professional. This person can help you identify valuable opportunities that can save you money on your taxes.

Remember to meet with us regularly to check in on your financial outlook. We can help you anticipate changes that might affect you, including changes to the tax code.