The Top 3 Mistakes that Retirees Make When Tax Planning

The Top 3 Mistakes that Retirees Make When Tax Planning


There are many tax challenges which retirees face. They often don’t understand how the state government and federal government taxes their investment returns and retirement benefits. That is why tax planning is essential to gain this understanding, especially for seniors. But this must be effective planning or else retirees could see negative consequences.


Tax Loss Selling

If you have investments which earned you capital gains and then you purposely sell a capital asset for a loss, this is known as tax loss selling. An investor will do this because it will balance their profit with their loss and allow them to avoid paying taxes on their capital gains.


The only problem with tax loss selling is that it can only be done to some extent. Although you can offset your capital gains by taking stock losses, you can only claim $3,000 in capital losses per year. This means any loss that is more than $3,000 must be carried over into future tax returns or simply ignored altogether. If you have a huge capital loss, it could take several years to benefit from the deduction because you can still only claim $3,000 in losses for each subsequent year. And if you have more losses in the future, you won’t be able to claim those if you’re still claiming a loss from a previous year.


Retirees need to study their investment holdings carefully and choose the right financial path for themselves.


Taking Few RMDs

A lot of retirees want to take as little required minimum distributions as possible. But, taking larger ones can still have its benefits. For example, a retiree with lower income will likely be in the low tax brackets. All they’ll want to do is keep their tax burden to a minimum. However, they won’t understand the tax burden that will be placed on their beneficiaries after they pass away. Once a retiree dies, their IRA benefits go to their beneficiaries through an inherited IRA benefit. If a full IRA distribution was taken, then the entire balance of the IRA gets subjected to income tax. This would not happen with minimum distributions.


Social Security Taxability

The common belief is that Social Security income is not subjected to income tax. In actuality, 85% still have to pay income tax on it. If a retiree has only Social Security as their income, then they won’t pay taxes on it. But, if they have income from other sources as well, then a portion of their Social Security will get taxed. The provisional income of the retirees should be calculated by taking the total of your adjusted gross income without including the Social Security and then adding all the tax-free interest you had. Finally, add 50% of the amount you get from Social Security per year. If you made enough income to where you’re in the taxable bracket, then you will be paying income taxes on that portion of your Social Security.


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