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It would be nice if the taxes stopped when you retire, but unfortunately, that doesn’t happen. However, they vary little, and it’s important for retirees to be aware so they don’t pay more tax than necessary.
GOBankingRates asked ChatGPT what tax mistakes retirees commonly make. Here it is said.
Missing or Incorrect Required Minimum Distributions
If you’re age 73 or older, you’ll need to withdraw some money each year from your taxable accounts, such as IRAs and 401(k). The amount you have to take is based on your age and your account balance at the end of the previous year, so it’s a different amount every year.
If you don’t take the full amount of your required minimum distributions (RMDs) in any year, you will be penalized at tax time. The penalty is 25% of the amount not taken, so if your RMD is $4,000 and you don’t take it, you’ll pay a $1,000 penalty.
In the first year you are required to take RMDs (which is currently the year you turn 73, but this may change), you can postpone your RMDs until April 1 of the following year. But remember, you still have to take your RMD for the next year, so you’ll have to take two RMDs a year. This can push your income into a higher tax bracket, so be careful about doing this.
Check out: 12 things you like Do this when your savings reach $50,000
Not coordinating Social Security taxation
Whether you’ll pay income taxes on your Social Security benefits, and how much your benefits will be taxed, depends on your income.
If a married couple’s combined income is more than $44,000, up to 85% of your benefits may be taxable. Combined income consists of your adjusted gross income, nontaxable interest, and 50% of your Social Security benefits.
Paying unnecessary state taxes on pensions
Some states, including retiree-friendly Florida, do not have a state income tax.
If you receive a pension and move to Florida or another state with no state income tax, be sure to update your tax forms and residency status so you don’t overpay.
Ignoring changes in tax law
Tax laws, including retirement-specific changes, such as the age at which you have to start taking RMDs and limits on how much you can deduct, change. Make sure you are aware of the current legislation so you don’t make any costly mistakes.
Being aware of current and future tax laws can help you avoid these common mistakes in retirement.