Taxes are one of the most significant expenses over the course of a lifetime, and entering retirement is no different. At Spark Wealth Advisors, we add value to our clients through strategic tax planning, helping to reduce their tax bill over time. While we don't file or prepare taxes for clients, we review them for accuracy and often find mistakes that can save clients thousands of dollars. Whether you file your taxes or use a preparer, having a copy of your last year's tax return is essential. In this blog post, we'll discuss five key areas retirees should review for accuracy. For a more comprehensive list of over 20 items, download our free guide using the link below.
1. Withholding: Avoid Underpayment Penalties
Taxes are withheld on income throughout the year, whether you're working or retired. When you retire, withdrawals from IRAs or pensions are considered taxable income and usually have associated withholding. If you didn't withhold enough, you might owe more when you file, or if you withheld too much, you might get a refund.
To avoid underpayment penalties:
Review Form 1040, Line 38: This line shows any underpayment penalty. If it’s zero, you’re in the clear.
Safe Harbor Rule: You can avoid penalties by paying 100% of last year's tax liability, or 110% if your adjusted gross income (AGI) is over $150,000. Alternatively, pay 90% of the current year's tax liability.
How to Apply Safe Harbor:
Example: If last year's tax liability was $15,000, paying at least $15,000 this year (or $16,500 if your AGI is over $150,000) avoids penalties, regardless of actual liability.
2. Capital Gains and Losses: Accurate Reporting
Capital gains and losses apply to taxable brokerage accounts, not retirement accounts like IRAs or 401ks. Ensure accurate reporting of:
Sales of investments: Gains or losses from selling investments in taxable accounts.
Cost Basis: Ensure the cost basis on your 1099-B form is correctly reported. Mistakes can result in higher taxes.
Common Issues:
Incorrect Cost Basis Reporting: If the institution reports a zero cost basis, you’ll pay taxes on the full sale amount. For instance, if you bought an investment for $20,000 and sold it for $30,000, you should pay capital gains on $10,000. An incorrect zero cost basis would make you pay on $30,000.
Carry Forward Losses: Losses exceeding gains can offset up to $3,000 of ordinary income per year, with the excess carrying forward indefinitely.
3. Qualified Charitable Distributions (QCDs) from IRAs
If you're over 70.5 years old, you can make Qualified Charitable Distributions (QCDs) directly from your IRA to a charity, avoiding income taxes on the distribution.
Reporting QCDs:
Form 1040, Line 4B: Ensure the taxable amount excludes QCDs. For 2024, up to $105,000 can be donated tax-free via QCDs.
4. Rental Properties: Review Schedule E
If you own rental property, review Schedule E for accurate reporting of rental income and deductible expenses such as:
Mortgage interest
Property taxes
Insurance
Maintenance
Profitability Check:
Evaluate profitability: Ensure you’re deducting all allowable expenses and reassess the property’s profitability. Some clients overestimate their rental income, not accounting for expenses.
5. Rollovers: Ensure Non-Taxable Treatment
Rollovers from 401ks to IRAs or similar movements should not be taxable. Incorrect processing can lead to significant tax bills.
Check Rollovers on Form 1040:
Line 4A or 5A: Reflects the gross rollover amount.
Line 4B or 5B: Should be zero if correctly processed.
If Errors Occur:
Contact your Tax Advisor: They can recommend steps, such as reaching out to the custodian for a corrected 1099-R form and possibly filing an amended return to recover overpaid taxes.
Download Our Free Guide
These five areas are part of a more comprehensive list of over 20 items retirees should review on their tax returns. For a complete guide, download our free resource here.
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About the author
Jake Skelhorn
Jake is a CFP Professional with a focus on planning for both traditional and early retirement. He’s a Florida native, growing up in Fort Lauderdale and now residing in Jacksonville with his husband Chris and their 120-lb “puppy” Barli. Jake enjoys cooking (favorite cuisine to make is Thai), traveling, and spending time with friends and family as much as possible.
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