I Asked ChatGPT Which Tax Mistakes Retirees Keep Making — Here’s What It Said
Written by
Karen Doyle
Edited by
Jenna Klaverweiden
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It would be nice if taxes stopped when you retire, but unfortunately, they don’t. They do change a bit, however, and it’s important for retirees to be aware so they don’t pay more taxes than they have to.
GOBankingRates asked ChatGPT which tax mistakes retirees commonly make. Here’s what it said.
Also see five tax mistakes Gen Xers are most likely to make and how to avoid them.
Missed or Incorrect Required Minimum Distributions
If you are 73 or older, you need to take some money out of your tax-qualified accounts, like IRAs and 401(k)s, each year. The amount you have to take is based on your age and your account balance at the end of the prior year, so it’s a different amount every year.
If you don’t take the full amount of your required minimum distribution (RMD) in any given year, you will be penalized at tax time. The penalty is 25% of the amount not taken, so if your RMD is $4,000 and you don’t take it, you’ll pay a $1,000 penalty.
The first year you are required to take an RMD (which is currently the year you turn 73, but this can change), you can defer your RMD until April 1 of the following year. But remember, you still need to take your RMD for the subsequent year, so you’ll end up taking two RMDs in one year. This could bump your income up to a higher tax bracket, so beware of doing this.
Not Coordinating Social Security Taxation
Whether or not you will pay income tax on your Social Security benefits, and how much of your benefit is taxed, depends on your income.
Up to 85% of your benefit may be taxable if a married couple has combined income of over $44,000. Combined income consists of your adjusted gross income, nontaxable interest and 50% of your Social Security benefit.
Paying Unnecessary State Taxes on Pensions
Some states, including retiree-friendly Florida, do not have state income tax.
If you get a pension and you move to Florida or another state with no state income tax, be sure to update your tax forms and residency status so you’re not overpaying.
Ignoring Changes in Tax Law
Tax laws, including retirement-specific changes like the age at which you need to start taking RMDs and limits to what you can deduct, change. Make sure you’re aware of the current law so you don’t make a costly mistake.
Being aware of current and future tax laws can help you avoid making these common mistakes in retirement.
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