Tax season can be a confusing time for many. Keeping up with various changes to the tax code is tough, especially if you aren’t using an accountant to prepare your taxes. Unfortunately, you may be audited or owe back taxes if you don’t keep up with the latest regulations. To help keep this from happening to you, we’ve compiled a list of some of the most common tax mistakes seniors make when filing their returns and how to avoid them.
Mistake 1: You didn’t track senior care expenses
Medical and other senior care-related bills can be difficult to track. Unfortunately, this means that many people have a hard time tracking or don’t track them at all, which can be a mistake when tax season comes. The cost of these expenses has the potential to be a tax write-off for you or your caregiver. If you’re not tracking the costs of senior care, there’s a good chance that you or a loved one is paying too much in taxes
To help you understand which senior care expenses can be a write-off for your caregiver, we’ve compiled a helpful article on caregiver expenses that can be tax deductible. If you don’t qualify as a dependent, we also have an article on tax deductions for seniors.
Mistake 2: Not knowing if you have to file a tax return
One of the most common mistakes that older adults make is assuming they don’t have to file taxes. Since most retirees don’t have W-2 income, they assume they aren’t required to file. The reality is that depending on your total income and the sources of that income, there’s a chance you’ll still have to file a tax return, even if you’re retired.
There are some marital status, age, income, and adjusted gross income (AGI) factors that help determine whether or not you have to file. You should consult a tax professional or the IRS publication for specific guidelines on your situation. But, generally speaking, an individual will not have to file a federal tax return under these circumstances:
- Un unmarried adult over 65 who makes less than $14,700 in non-exempt income (excluding Social Security benefits).
- Married adult over 65 with a spouse under 65 who makes less than $27,300 in non-exempt income (excluding Social Security benefits).
- Married adults over 65 with a spouse also over 65 who makes less than $28,700 in non-exempt income (exlcuding Social Security benefits).
There is an added stipulation about AGI as well. If the total of half the person over 65’s Social Security benefit plus their AGI and tax-exempt interest/dividends amounts to more than $25,000 (single filers) or $32,000 (married filing jointly), then some of their Social Security benefits will be taxable. This rule is a bit complex, so it is important to review the IRS Publication 554 or consult a trusted tax professional.
Mistake 3: You didn’t take your required minimum distributions
A required minimum distribution, also known as an RMD, is a mandatory distribution from a retirement account for people 72 and older. Once you reach 72, taking your RMD is critical, even if you’re still working. Not withdrawing money from a retirement account might not seem like a big deal, but it actually is.
If you don’t take your required minimum distribution by December 31 of a given year, you will incur penalties on the money you were required to withdraw but chose not to. As of 2022, the penalty is 50% of the amount not withdrawn, which can be an incredible sum.
To avoid paying the penalty for not taking your RMD, you’ll first have to calculate how much your RMD is. Unfortunately, this isn’t as easy as it sounds. If you would like to do so yourself, the IRS has literature regarding RMDs and how to calculate them here. If you don’t want to do this yourself, you can always enlist the help of your accountant.
Mistake 4: You didn’t seek help with filing your taxes
This is a common problem that many of us have. Every year, countless people do not seek help when tax time rolls around, which can be costly. Oftentimes, when people try to do their taxes themselves, they can miss something important. Perhaps you missed a deduction you didn’t know about or completed your tax return incorrectly. Missing something on your taxes can lead to something simple as paying more taxes than legally required, to as serious as an audit from the IRS.
Regardless, you don’t want to find yourself in either situation. This is why it’s often best to seek help when filing your tax return. Help can manifest itself in several ways, whether it’s a trusted friend or relative, a great CPA, or a free government program. If a family member want to help you file taxes, we provide tips on what the person can do to increase the likelihood that they don’t miss anything in our article about how to file a parent’s tax return.
At the end of the day, the most common tax mistakes are often the simplest ones to avoid. As long as you remember the common mistakes and work to avoid them, tax season should go off without a hitch. Remember, you should never be afraid to enlist help when preparing your taxes because a tax professional can help you side-step these errors before they happen.