Common Tax Problems for Retirees

Common Tax Problems for Retirees

Common Tax Problems for Retirees

Retirement changes your financial situation, and can also result in changes to your tax situation. Be prepared for new tax brackets, different tax obligations, and tax rules you’ll have to pay close attention to during retirement.

A failure to keep up with your tax responsibilities can result in tax penalties, accumulated back taxes, and IRS enforced collection actions. Keep these issues in mind as you begin your retirement.

Tax Withdrawals During Early Retirement

If you retire early, you may not be able to access the funds in your retirement account without paying penalties. Money in your 401(k) or IRA generally can’t be withdrawn until you reach age 59 1/2. Early withdrawals will result in a 10% penalty.

A 10% tax rate may not sound so bad, but that penalty is in addition to the income taxes you’ll have to pay. Most of the money in your retirement account hasn’t been taxed yet, so you will end up paying your marginal income tax rate plus the 10% early withdrawal penalty.

Special exceptions apply for certain hardship withdrawals, so see if you qualify before making an early withdrawal. If you have a Roth IRA, your withdrawals are generally not taxable, but can be taxed or hit with the 10% early withdrawal penalty in certain cases.

Estimated Taxes

If you’ve primarily worked as an employee, you may have never paid estimated taxes before. That may change during retirement.

If you receive Social Security benefits, retirement account distributions, and other income, it’s possible you’ll have to pay quarterly estimated tax payments. A failure to do so will result in a large tax bill when you file your return and the risk of underpayment penalties.

You can also choose to have taxes taken out of your Social Security benefits. These amounts may not be taxable for those that have no other income sources, but up to 85% of your benefits may be taxed if you have a higher income.

Accumulated Tax Debt

Some people feel the pressure to earn as much as possible during their last years of employment. They may put off paying their taxes in order to fund their retirement accounts and keep up with expenses, resulting in a sizable tax debt balance when they reach retirement.

If you don’t resolve your tax problems, your bank accounts, retirement accounts, and even Social Security benefits could be vulnerable to IRS collection actions. Contact a tax resolution attorney to get your tax issues squared away and increase your financial security during retirement.

The Gartzman Law Firm can negotiate a levy release or prevent a pending IRS levy or wage garnishment. Use our contact form to request a consultation with an Atlanta tax resolution attorney.

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