One of the biggest challenges retirees face is remembering that there are still some deadlines that apply to them. You might not have to worry about submitting quarterly business reports or filing the right paperwork in a timely manner, but the IRS still expects you to comply with a number of tax laws. So as the end of the year approaches, retirees should get the following five things done as soon as possible in order to take maximum advantage of favorable provisions while avoiding some major pitfalls.
1. Take your required minimum distributions from your retirement plan
Retirement accounts like IRAs and 401(k)s give you big tax incentives to set aside money for your retirement. However, the IRS only gives you so much time to grow your savings in traditional IRAs and 401(k)s on a tax-deferred basis. Once you turn 70-1/2 years old, you have to start taking required minimum distributions based on tables provided by the IRS.
If you just turned 70-1/2 this year, then you get a special extension until April 1, 2018 to take your first RMD. After that, though, you'll need to get the money out of your retirement account by Dec. 31. If you don't, you'll face a huge 50% penalty on the amount you should have withdrawn. That makes it worth your while to get this task done well before year-end.
2. Look to harvest tax losses in your investment portfolio
Losing money on your investments is never fun, but it doesn't have to be a complete disaster. The tax laws allow you to claim capital losses on investments that have lost you money. The only requirement to harvest tax losses is that you sell the losing investment on or before Dec. 31 and then not buy back that same investment within 30 days of selling it. You can use the resulting capital losses to offset capital gains (and thus capital gains taxes) on winning investments. If you completely cancel out your capital gains and still have losses left over, you can deduct up to $3,000 per year from other income like interest, dividends, or taxable pensions.
Many investors use this strategy, so if you wait until the very end of the year, you may end up being the last to sell a particular losing stock. That may lead you to get a rock-bottom price for your shares, exacerbating your losses. Being first to use tax-loss selling can get you in front of the crowd and sometimes earn you a better price on your sale.
3. Get your deductible expenses paid
Retirees can use a variety of tax deductions to reduce their tax bills, but most of them require taking action by the end of December. Charitable contributions, real estate tax payments, medical bill payments, and many other items can be eligible for itemized deductions under certain circumstances, and taking the time to itemize can be worth it for those who have sufficiently large eligible expenses.
To ensure that you won't run into trouble, make sure you pay, and can document, your payments well before Dec. 31 rolls around. Getting a receipt, keeping canceled checks or credit card statements, and asking for confirmation from charities is the best way to prove that you made your payments in a timely manner and are therefore eligible for the appropriate deduction.
4. Consider doubling up on key deductions before they disappear
For 2017 in particular, there's reason to consider taking special action with your annual deductions. The current tax reform plan proposes major changes to taxes, including the elimination of deductions for major expenses like medical bills and state and local income taxes. Moreover, a higher standard deduction could make it less valuable to itemize in the future.
Consider whether you're likely to itemize under the new tax laws if they take effect. If not, then it could be worthwhile to pay some extra deductible expenses before 2017 ends, essentially doubling up on certain deductions. Possibilities include making 2018 charitable contributions early, prepaying taxes that are due in 2018, and having medical work done now, rather than later.
5. Get your tax documents together
It's never too early to start collecting the documents you'll need to prepare your return. You won't get key items like year-end statements and 1099 forms until after the beginning of the year, but you should have some information already that you can gather to get an early estimate of what your tax picture will look like.
Being organized now before crunch time hits is the best way to ensure that you won't get overwhelmed when tax season kicks into high gear. Moreover, it will help you figure out in advance what tax forms and other information you should be receiving in early 2018.
Be smart about your taxes
Retirees don't have to worry about nearly as much as those who are still working, but that doesn't mean they get to spend tax season on the sidelines. By taking care of this to-do list sooner rather than later, you'll ensure that you stay ahead of the tax man and save yourself valuable time and peace of mind.
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