Many folks are already working to file their taxes… especially if
they have refunds due. But nearly 60% of taxpayers worry quite a bit
about their taxes.
- Worry about what they might owe the IRS.
- Worry about completing the paperwork properly.
- Worry about a potential IRS audit.
So, we’ve put together these 5 tips to help calm fears and make certain your taxes are as stress-free as possible.
Mistake #1 – Skip Filing Taxes
Many individuals mistakenly think they don’t need to file if they
don’t have a paycheck. This is especially true for seniors. Small
business owners may make this mistake too – particularly if they haven’t
been making estimated tax payments. Regardless, it is never a good idea
to skip filing. Failure to file penalties can be excessive – 5% of
overdue taxes for each month the return is late.
If you have a reason why you can’t file on time, simply file for an
automatic six-month extension for the IRS by filing Form 4868. In many
cases, this will protect you from getting hit with late-filing fees.
And it is important to note that filing for an extension doesn’t give
you more time to pay your taxes. If you owe, estimate that amount and
be sure it is paid by the filing due date.
Mistake #2 – Social Security
Many seniors assume their Social Security benefits aren’t taxable. That
isn’t always true. In certain situations Social Security earnings can be
taxed if you are married and your income is above $44,000. They can
also be taxed if you are single and your earnings are greater than
As much as 85% of your Social Security income can be taxed depending on how far above the thresholds your actual income is.
This is where talking with a professional is important. For example,
some believe if income is from tax-exempt interest like from municipal
bonds, they don’t have to worry about how it influences the taxation of
Social Security benefits. This would be a mistake.
Mistake #3 – Required Minimum Distributions
If you have money in an IRA or 401(k), you need to begin taking required
minimum distributions (RMDs) after you turn age 70 1/2. If you fail to
do so, you risk a 50% penalty on what you should have withdrawn.
Financial organizations that administrate these plans have a requirement
to advise you on your RMD. However, the responsibility to take the
distribution resides with you.
If you’ve discovered you’ve made a mistake in taking your distribution,
you need to correct that right away. Showing that you recognize the
error and have taken action to correct it will help with the potential
of having the IRS waive fees.
Also, if you don’t plan your required minimum distributions carefully,
you could end up bumping yourself into a higher tax bracket. Again, this
is where talking with a qualified financial advisor is critical to find
the most tax-advantaged ways of dealing with RMDs.
- Some Bonds Get Taxed
Bonds are a popular option for folks in or nearing retirement. But
it’s a mistake to believe that all bonds are tax-free. Some local bonds
carry tax risk.
For example, some municipalities issue bonds for constructing things
like sports arenas. These are called “private activity bonds”. If you
face the alternative minimum tax or AMT, the interest from these types
of bonds must be included in AMT calculations.
As a result, you could face a 28% federal income tax on that bond income.
The AMT was created years ago to prevent abuse from wealthy
individuals claiming too many deductions. However, the tax itself hasn’t
been indexed to inflation. That means that many middle-income taxpayers
are now trapped paying AMT… so be very careful about this.
It’s popular for folks in retirement to distribute assets as gifts to
their children and grandchildren. The thinking is this helps to
minimize the size of the estate and potential probate taxes. Given that
folks with assets of more than $5.45 million face Federal estate taxes a
high as 40% it’s understandable why people want to avoid this.
You can give gifts up to certain thresholds after which if you give away
more than the threshold you have to report the gift to the IRS.
Many people fail to make these filings because they misunderstand
federal rules governing estates and gifts. It’s wise to talk with
someone that knows about taxation to make sure you have a clear strategy
for wealth distribution from your estate while you are still alive.