Each spring, millions of us look forward to our tax refunds. You might have big plans to spend that money on a vacation, or new furniture, or a down payment on a car. Or, you might be one of the super-smart savers who is counting on stashing it in their savings account. Whatever your goal, we hope you get it… But never count on it happening for sure. In retirement you could accidentally sabotage your ability to get a tax refund, for the following reasons…
You, or your spouse, didn’t have taxes withheld. Even if you’re retired, you might be working a part-time job, or your spouse might still be working. So you should both be careful to fill out those W-4 forms carefully. You will owe some income taxes, but if you didn’t pay enough, you’ll owe the IRS rather than them owing you!
You received too much money in healthcare subsidies. Sometimes workers need to retire before reaching age 65, the age of Medicare eligibility. So, in the meantime, you might apply for subsidies on your state’s healthcare exchange (or the federal exchange, as the case may be). These subsidies can help you reduce the cost of health insurance premiums, but they need to be calculated carefully. If the IRS decides you received too much of this credit, you will end up owing them money when you file your return.
You tapped your retirement account too early. If you withdrew money from your retirement account (a 401k or IRA) before you reached age 59 ½, you will most likely owe a 10 percent penalty on that amount. This penalty will probably wipe out any tax refund you would have received. However, if you were forced to retire early due to disability, or to cover un-reimbursed medical expenses above 7.5 percent of your income, you won’t owe the penalty.
You forgot to take a retirement account withdrawal. On the other end of the spectrum, you could accidentally take your first retirement account withdrawal too late. You’re required to begin distributions by age 70 ½, or else face a tax penalty in the amount of 50 percent of the amount you should have withdrawn.
You forgot to claim valuable tax breaks. You might qualify for more credits and deductions than you think, so remember to work with a qualified tax professional before submitting your return.
Since tax laws can change from year to year, never count on getting a refund to fund an important purchase or your emergency savings. Meet with us regularly to continue planning your retirement income strategy, so that a surprise hopefully won’t become a major setback.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.