The last thing any retiree would like to see happen is to have their plans interrupted due to tax difficulties. Yet with the complex rules regarding calculating income, minimum withdrawals from retirement accounts, and deducting various expenses, mistakes made in filing tax returns are common for elderly individuals.
Such mistakes can result in expensive and time-consuming tax consequences. Unfortunately, while possibly being cash strapped, senior citizens often have a fixed income with little financial flexibility.
Significant mistakes retirees can make include:
- Failing to understand that most income retirees receive will be taxable. Depending on circumstances, this can include Social Security payments, withdrawals from retirement accounts and various government benefits.
- Not understanding that the failure to take minimum distributions from a retirement account can also result in tax ramifications. Though this does not apply to Roth IRAs, with most 401(k)s or traditional IRAs, you will need to taking these minimum withdrawals when you reach the age of 70 1/2 years old. Failing to do so could result in a 50 percent tax penalty on any amount not removed.
- The failure to keep good records regarding medical expenses and other health care costs. Seniors need to properly document any such expenses in order to not lose out on otherwise appropriate deductions.
It's difficult to follow all of the laws in place governing such considerations. Yet such mistakes can lead to penalties and fines. In certain instances, the taxes on retirement income can diminish the size of your estate substantially. Having guidance regarding retirement tax considerations is therefore extremely important.