Retirees: Don’t Make These Tax Mistakes!


Retirement is supposed to be a time of relaxation, of enjoying the finer things in life. Unfortunately, this means that many seniors rest on their metaphorical laurels as they relate to reviewing tax strategies, and that can result in some significant oversight.

For example, many retirees and financial planners work as hard as they can to minimize their required minimum distributions (“RMDs”). The concept seems simple: smaller RMDs, lower income numbers, lower tax bracket, fewer taxes. However, taking the smallest RMDs possible focuses too much on a retiree’s life, rather than considering their estate planning as well. Beneficiaries of an inherited IRA may be stuck with a hefty income tax bill on the entire balance when it passes to them. Better estate planning can save your heirs from a big bill to the IRS.

Another common mistake is to think Social Security is free from taxes. That’s not really true – under some circumstances, Social Security can have income tax applied. If you have a minimal income, your Social Security likely won’t be federally taxed, but it depends on the calculation of your “provisional income.”

The provisional income calculation has three parts to add together: your adjusted gross income (other than Social Security), any tax-free interest you have received (often interest from municipal bonds), and 50% of your Social Security benefit.

Taxation of provisional income by brackets:

  • <$25,000 (filing singly) or <$32,000 (filing jointly): no federal income tax on Social Security benefits
  • Between $25,000 and $34,000 (filing singly) or between $32,000 and $44,000 (filing jointly): federal taxes on up to 50% of your Social Security benefits
  • >$34,000 (filing singly) or >$44,000 (filing jointly): federal taxes on up to 85% of your Social Security benefits

Review and calculate your provisional income annually so you don’t receive a surprise from the IRS, and so you can plan accordingly.

Another pitfall for retirees is over-reliance on tax loss selling (also known as tax loss harvesting).  Again, the concept is straightforward enough: you expect to sell a property and incur some capital gains tax, so you sell some under-performing stock to set the investment loss against the capital gain and keep your taxes lower.

However, stock losses are not something Uncle Sam particularly wants to encourage, so the tax advantages are limited. If you have excess losses over gains, you can only take an excess of $3,000 annually as an offset for taxes on other income. If you have more than $3,000 in losses, you can carry it forward to keep applying it, but it might take quite some time if it was a serious loss. Before you jump to sell off stock at a loss, think about the economic consequences short-term and long-term to decide whether it’s the right choice.

Take care with your taxes in retirement. You’ve worked hard your whole life to put together a plan so that you can retire comfortably, not to send your money back to the IRS because of an oversight.

Reference: Kiplinger (December 13, 2017) “3 Tax-Planning Mistakes Retirees Too Often Make”