6 Tax Filing Tips for Retirees, According to Finance Experts
No, even retirement can't save you from taxes.
Tax season is hard enough as a member of the workforce. But filing your taxes as a retiree gets even trickier. In exchange for no longer pulling down a biweekly paycheck, you needn't ever have to worry about filling out W-2s and 1099s or setting up direct deposits. Shouldn't the taxes stop as well? Alas, that is not the case. What's more, after you retire, there are even more considerations you should keep in mind during tax season. To help you in the process, we consulted financial experts. Read on for their top tips about filing taxes for retirees.
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Remember: You technically still might have income.
Even retirees can earn income. It just doesn't exactly take the shape of a regular paycheck.
"Common taxable income for retirees includes pensions, traditional IRA distributions, taxable interest, net capital gains, and up to 85 percent of Social Security benefits," tax expert Eric Bronnenkant tells Best Life. As you file, be sure to qualify any of those as income.
And yes, even though you paid into Social Security your entire life, it can still technically be taxed by the IRS. Bronnenkant says the rates range from 0 percent, 50 percent, or 85 percent "depending on the level of combined income." You can calculate your rate on page 7 of this IRS document.
But if Social Security is all you have, you (probably) don't have to file.
Bronnenkant pointed this line out, directly from the IRS: "Generally, if Social Security benefits were your only income, your benefits are not taxable and you probably do not need to file a federal income tax return." Sounds pretty good! There is, however, one thing to be mindful of.
"However, if you elected to have any withholding taken out of your benefit, you would be required to file a tax return to claim a refund," Bronnenkant said.
Be aware that you may be in a new tax bracket.
The tax rate doesn't apply to your total income, obviously, but nevertheless: Every dollar you earn in the new bracket is taxed at a higher rate. And after you retire, you might land in a bracket you're not acclimated to. In other words, more is still more—just not as much more as you may have calculated.
"While there technically isn't a separate tax bracket for retirees, many retirees will end up in a different tax bracket than they used to be in due to their retirement income," Andy Kalmon, CEO of Benny, a financial services organization, explains.
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Remember to take your RMD.
Your RMD, or "required minimum distribution," is the baseline amount of money you need to withdraw each tax season from your retirement accounts. It kicks it at age 72, per the IRS, and you should absolutely remember to take it. Bronnenkant points out that RMDs are subject to a whopping 50 percent penalty on any shortfall.
"While the IRS does not define reasonable error, 'I forgot' or 'I did not know' will likely not pass muster," Bronnenkant says. However, he adds that being ill or in a nursing home may be acceptable.
You could be eligible for free tax advice.
If you're over the age of 60, Kamon points out, you can make use of a specialized IRS program called Tax Counseling for the Elderly (TCE). TCE connects people over 60 with volunteer tax consultants who can offer tax filing advice—with a focus on pensions and what the IRS describes as "retirement related issues unique to seniors." Don't worry: All volunteers must pass IRS training. Also: The program is free.
"Because Social Security can make taxes even more complicated than they already are, having this kind of assistance is truly invaluable," Kalmon says. "Experts through this program are knowledgeable with all the complicated topics like Social Security, pensions, and more, and they can assist you all the way until filing, helping ensure that everything is done correctly."
TCE-affiliated tax experts can be found directly through the IRS website.
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Watch out for scammers.
During tax season, it's imperative to be extra mindful of potential scammers—especially if you're in retirement. According to the National Council on Aging, government agent impersonations are among the most common financial scams that hit seniors.
One common scam sees "IRS agents" (note: they're not really IRS agents) calling you with the threat of jail if you don't pay your taxes via debit card immediately. Another one: Inundating you with emails threatening to deactivate your Social Security number—if you don't pay them with a gift card, of course.
Remember: the IRS will never ask for immediate payment or specify how exactly you make any necessary payments. And more often than not, they'll reach out multiple times via snail mail before resorting to the phone.
Beyond the obvious (keeping your social security and other tax documents secret and safe), filing your taxes as early as possible is also a good idea. Doing so can "mitigate the risk that a fraudster could file before you using your social security number," Bronnenkant said.
But if you really want to protect your identity, you can go the extra mile and sign up for an Identity Protection PIN (IP PIN). Once you've signed up for an IP PIN, anyone who wants to file taxes in your name—whether it's you or a wannabe scammer—will need to provide that number. It's not foolproof (nothing is) but it's an extra measure that can keep you safe from wannabe scammers. An IP PIN only lasts for one calendar year. The sign-up process turns on around mid-January each year.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.
- Source: https://www.irs.gov/pub/irs-pdf/p915.pdf
- Source: https://www.irs.gov/pub/irs-news/at-01-08.pdf
- Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
- Source: https://www.irs.gov/individuals/free-tax-return-preparation-for-qualifying-taxpayers
- Source: https://irs.treasury.gov/freetaxprep/
- Source: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin