I’m an Accountant: The 10 Most Common Mistakes Retirees Make on Their Taxes

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Taxes can be overwhelming under any circumstances, but retirement can add a whole new set of complications to the mix.

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In retirement, your income may be coming from retirement accounts and/or Social Security, which have different rules of taxation than traditional income from employment.

To help retirees avoid tax trouble, GOBankingRates spoke with Jon Gassman, an accountant and certified financial planner with G&G Planning Concepts, Inc., and Josh Zimmelman, an accountant and managing director of Westwood Tax & Consulting. They explained the most common mistakes retirees make on their taxes.

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Disorganization

A big mistake that many taxpayers make — not just retirees — is being unorganized and/or irresponsible about your tax return, Zimmelman said.

“If your financial paperwork is a mess, then your financial situation might also be. A careless error or oversight on your return can cost you. Forgetting to file your return on time can also result in late penalties and interest fees.”

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Not Understanding Retirement Account Taxation

It’s easy for retirees to forget that different retirement accounts are taxed differently, Zimmelman said.

“For example, withdrawing funds from a traditional IRA has a different tax impact than withdrawing the same amount from a Roth IRA,” he said. “Making the wrong choices could result in higher capital gains taxes, higher Social Security taxes and more.”

This could even result in higher Medicare premiums, he said.

Not Taking RMDs

Additionally, the IRS requires that retirees take a certain amount of money out of their IRAs, known as “required minimum distributions,” or RMDs, Zimmelman said.

“If you’re 72 or over, you most likely are required to start taking out some of your pre-tax retirement money from your funds. Failing to do so could result in fees and penalties, as high as 50%,” he said.

Unfortunately, Gassman said, “Retirees frequently have a lack of awareness or understanding of the rules regarding annual RMDs.”

You don’t want to overlook this and face penalties.

Confusion Around Itemizing Deductions

The IRS allows taxpayers to take two kinds of deductions on their taxes: a standard deduction, which is a set amount, or an itemized deduction, which allows you to write off specific expenses, Gassman explained. Failing to grasp the distinction between these deductions is common for retirees.

“Some retirees are unaware that they can choose between a standard deduction and itemizing deductions,” he said. They should opt for the variation that provides the greatest benefit.

For example, he said, those with substantial medical expenses, like someone paying for geriatric care aids, may find itemizing more advantageous to itemize. “$200,000 is a large deduction not to take advantage of.”

Not Taking Medical Deductions

Retirees also may misunderstand the rules for deducting medical-related expenses, including what qualifies and what doesn’t, Gassman shared.

“Many seniors, unable to afford professional tax preparation, seek guidance on deductions related to long-term care facilities [and] medical insurance… As seniors tend to get older, the cost of care increases.”

Incorrect Stocks Sold Calculations

Incorrectly calculating the cost basis for sold stocks, particularly for those still holding physical stock certificates, is a common mistake Gassman sees.

“Failure to include dividends reinvested over time in the cost basis can lead to significant miscalculations. Properly accounting for these reinvestments can turn a potential tax liability into a loss,” Gassman said.

Not Reporting Tax-free Income

If something is tax free, such as municipal bond income, you might think you don’t need to report it. However, Gassman said that’s not exactly true.

“While tax-exempt interest itself is not taxable, it can impact the taxation of Social Security benefits,” he said. “The interest serves as an additional factor in determining the taxable portion of Social Security benefits.”

Unnecessarily Paying State Taxes on Pensions

Moving from one state to another may trigger oversights, Gassman said, such as an individual continuing to file New York income tax returns on a pension received in Florida, despite New York’s exception from taxing such income.

Taking Social Security Too Soon or Too Late

The best time to start taking your Social Security benefits is different for everyone, but a common mistake retirees make is starting Social Security either too early or too late, Zimmelman said.

“In general, the longer you wait to start, the higher the monthly payments will be. However, there is such a thing as waiting too long. There is no one size fits all answer. It all depends on when you retire, how much you have in savings and your physical health.”

Not Hiring a Tax Professional

If you don’t really know what you’re doing when it comes to taxes, trying to go it alone can result in your making costly errors, Zimmelman warned. “To be sure you’re making decisions that are the most tax-efficient, consider consulting with a professional — a tax accountant or other financial planner.”

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This article originally appeared on GOBankingRates.com: I’m an Accountant: The 10 Most Common Mistakes Retirees Make on Their Taxes