Because retirees have relatively lower incomes and fewer deductions, it’s not very uncommon for them to think that they don't need to worry a lot about income tax preparation. The truth is, retirees face unique tax challenges that require effective tax planning to prevent potential problems in the future. Of course, they have certain advantages over taxpayers of other age groups, however, not planning your taxes carefully can lead you to costly mistakes and hamper your retirement income. Here are 3 mistakes seniors should avoid ensuring better tax for retirement-
Tax Loss Harvesting (Excessive) - Also known as tax-loss selling, tax loss harvesting is the act of selling a capital asset for loss in order to offset a gain realized by the sale of other investments. Though it might be a good tax-saving strategy, excessive tax loss harvesting isn’t particularly useful in retirement accounts, IRA or 401(k). The reason? The loss generated in a tax-deferred account cannot be deducted.
Not Carefully Managing their Withdrawals - A lot of retirees don’t properly manage their IRA withdrawals, as a result of what, they end up paying more taxes later. Once you turn 59, you can withdraw money from your tax-deferred accounts without having to pay an early-withdrawal penalty, however, it’s very important that you carefully manage these withdrawals, so you do not end up moving into a higher tax bracket.
Not Taking Social Security Taxability Into Account - There is a misconception among people about social security that it is not taxable. The truth is, up to 85% of it can be subject to tax. Though retirees with minimal income don’t have to pay federal taxes on their benefits, however, for any additional income, some tax is levied. Work with a financial planner to determine if any additional income impacts the taxation of social security.
Effective tax planning is equally important for seniors as others so they can avoid costly mistakes and ensure a more stable, relaxed, and secure financial future. The process may sound simple but the nitty-gritty of it can be difficult to grasp. To plan your taxes wisely, get in touch with Chris Cooper — a professional fiduciary and expert for tax planning and advice.