Retirement brings a welcome shift in daily routines, but it also introduces new financial considerations—especially when it comes to taxes. Reviewing your tax return each year is just as important in retirement as it was during your working years. In fact, careful review can help you avoid costly mistakes, optimize income sources, and preserve your wealth over time.
Here are key issues retirees should keep in mind when reviewing their tax return:
1. Social Security Taxation
Many retirees are surprised to learn that a portion of their Social Security benefits may be taxable. Whether your benefits are taxed depends on your provisional income, which includes half of your Social Security benefits, plus other income sources like pensions, dividends, IRA withdrawals, and tax-exempt interest.
- Review your return to ensure your Social Security income is reported accurately and taxed appropriately.
2. Required Minimum Distributions (RMDs)
If you're age 73 or older (or 72 if you reached that age before 2023), you're required to take minimum distributions from your retirement accounts like IRAs and 401(k)s. Failing to take the full RMD can result in significant penalties.
Double-check that your RMD was calculated correctly and included as taxable income.
Consider strategic withdrawals or Qualified Charitable Distributions (QCDs) to manage your tax liability.
3. Capital Gains and Losses
Many retirees draw income from taxable investment accounts. It’s important to understand how gains are taxed:
Long-term capital gains (for assets held over a year) are taxed at a lower rate, which can be 0%, 15%, or 20% depending on your total income.
Watch out for unexpected sales or mutual fund distributions that can trigger gains.
Offset gains with any capital losses you’ve incurred during the year.
4. Taxation of Pensions and Annuities
Most pension and annuity income is taxable, but the rules can vary depending on how and when you contributed.
Confirm that the taxable amount shown on your 1099-R is correct.
Review any cost basis recovery if you've made after-tax contributions to your plan.
5. Healthcare Costs and Premiums
Medical expenses and Medicare premiums can affect your tax return in several ways:
Medical expenses that exceed 7.5% of your adjusted gross income (AGI) may be deductible if you itemize.
Your Medicare Part B and D premiums can increase if your income crosses certain thresholds due to the Income-Related Monthly Adjustment Amount (IRMAA).
Consider the tax impact of income spikes (like Roth conversions or asset sales) that could push you into a higher IRMAA bracket.
6. Opportunities for Roth Conversions
Retirement can present a window of opportunity to convert pre-tax retirement funds to Roth IRAs at lower tax rates—especially before RMDs begin.
Review your taxable income and consider whether a partial Roth conversion could make sense to reduce future tax burdens.
7. Charitable Contributions
If you're charitably inclined, there are ways to give that provide tax advantages:
Qualified Charitable Distributions (QCDs) from your IRA (if you're over 70½) can count toward your RMD and exclude the distribution from taxable income.
If you itemize, make sure to include all deductible donations and retain documentation.
8. State Tax Considerations
Some states tax retirement income, while others don’t. When reviewing your federal return, also check:
Whether your state taxes Social Security, pension, or IRA income.
Any available exemptions or credits for seniors.
Final Thoughts
As a retiree, your tax picture is likely more complex than you think—but with that complexity comes opportunity. A thoughtful review of your tax return can help you preserve your income, manage your tax brackets, and plan smarter for the years ahead.
If you’re unsure whether you’re making the most of your tax situation, consider working with a financial professional who understands retirement planning and tax strategy. A little proactive planning can go a long way toward keeping more of your hard-earned money in retirement.
*Steffens Financial Corp. does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
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