9 Things Retirees Get Wrong on Their Taxes That End Up Costing Them

Paying taxes in retirement can be confusing and overwhelming. From Social Security to retirement accounts and investments, everything has its own unique rules that can take time and energy to figure out. There's also the worry that you might make a mistake on your taxes. Even the smallest of missteps can add up to hundreds or thousands of dollars in overpaid taxes.

Here are common tax mistakes retirees make and some practical ways to avoid wasting money in retirement.

Selling investments at the wrong time

Capital gains taxes can sneak up on you if you sell investments impulsively. And selling investments without proper planning can lead to an unexpectedly high tax bill. Capital gains taxes depend on how long you've held an investment and how much profit you realize, so impulsive sales can push you into a higher bracket or increase the taxability of your Social Security.

To avoid surprises, keep track of your cost basis, distinguish long-term gains from short-term ones, and time sales strategically across tax years. You could also consult a financial planner or tax professional for help. Thoughtful planning can significantly reduce what you owe.

Forgetting about RMDs

Forgetting about required minimum distributions (RMDs) can lead to one of the most expensive mistakes retirees make. If you miss your RMD or take it late, the IRS can impose a penalty of up to 25% of the amount you should have withdrawn. To avoid this, mark your calendar every year, pay attention to changing RMD ages, and consider setting up automatic withdrawals. A financial advisor or custodian can also help you track deadlines so nothing slips through the cracks.

Not factoring in Social Security

Don't assume Social Security is tax-free. Not factoring in Social Security can lead to an unpleasant surprise at tax time. Many retirees assume their benefits are tax-free, but depending on your total income, up to 85% of your Social Security can be taxed.

The key is to understand how other income, like IRA withdrawals, pensions, and investment gains, affects that calculation. To minimize taxes, time your withdrawals carefully, consider qualified charitable distributions, and use online calculators or a tax professional to estimate your taxable income each year.

Withdrawing from retirement accounts inefficiently

Withdrawing from retirement accounts inefficiently can cost you far more in taxes than necessary. Taking large sums from a 401(k) or IRA in a single year may push you into a higher tax bracket or increase how much of your Social Security is taxed.

To avoid this, plan withdrawals across multiple years, coordinate them with other income sources, and consider partial Roth conversions to spread out your tax liability. A thoughtful withdrawal strategy can reduce your lifetime tax burden significantly.

Not accounting for state taxes

Failing to account for state taxes can leave retirees paying more than they expect. While federal taxes get most of the attention, state rules vary widely. Some states tax pensions and Social Security; others don't. Many have unique deductions or exemptions you could be missing.

To avoid overpaying, review your state's tax laws annually, look for credits you qualify for, and consider moving to a more tax-friendly state (if it fits your lifestyle). Even small adjustments can meaningfully reduce your overall tax burden.

Overlooking deductions and credits

Overlooking deductions and credits is an easy way to pay more in taxes than you need to. Many retirees miss out on savings from medical expenses, charitable giving, or energy-efficient home improvements simply because they don't track receipts or assume they won't qualify.

To avoid this, keep detailed records throughout the year and review the full list of deductions and credits before filing. Even modest deductions can add up to meaningful tax savings over time.

Withdrawing from taxable accounts before tax-advantaged ones

Withdrawing from taxable accounts before tapping tax-advantaged ones can backfire over time. While it may feel logical to leave retirement accounts untouched, relying solely on taxable savings early can lead to larger required withdrawals and higher taxes later.

A better approach is to build a balanced withdrawal strategy that coordinates taxable, tax-deferred, and tax-free accounts to minimize your lifetime tax bill. Working with a planner can help you sequence withdrawals most efficiently.

Not planning for Medicare-related taxes

Not planning for Medicare-related taxes can lead to costly surprises. Higher retirement income may trigger IRMAA surcharges, significantly raising your Medicare Part B and Part D premiums. To avoid this, manage income spikes, time Roth conversions carefully, and monitor your modified adjusted gross income each year so you stay below key thresholds.

Failing to coordinate with a tax professional

Finally, it is important to take the time to work with a tax professional. Tax laws change frequently, and mistakes can be costly. Meet annually with a CPA or financial planner who specializes in retirement taxes to make adjustments as needed. A tax professional could also help you get out of tax debt, if you have any.

Bottom line

Retirees can easily overpay on taxes if they overlook RMDs, withdrawals, Social Security rules, deductions, or account sequencing. Careful planning, strategic withdrawals, and working with a tax professional can help minimize unnecessary payments and maximize your senior benefits.

Here's a detail worth noting: Nearly half of retirees underestimate how much of their Social Security benefits will be taxed, making proactive income planning even more important.

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