12 Things Almost Every Retiree Gets Wrong When Tax Planning

Once you get to retirement, the last thing you want to think about is taxes. Unfortunately, many retirees let their hard-earned savings and retirement income slip away by making avoidable tax planning mistakes.

Taxes don't disappear when you retire. Many retirees face higher tax burdens than they expected, largely due to required distributions, taxable Social Security benefits, and other unexpected income sources.

Here are 12 tax planning mistakes that catch retirees off guard and what you can do to avoid these money mistakes.

Many retirees assume that when their working years are over, they drop into a lower tax bracket.

This may not be the case. Depending on where you live and your total income, you may owe taxes on your Social Security benefits. Plus, withdrawals from your retirement account are taxed as ordinary income.

With required minimum distributions (RMDs), you may find yourself in the same or even a higher tax bracket than when you were working.

What if you've planned so well that you don't need to use the money in your traditional IRA or 401(k)?

Starting at age 73, you must take annual RMDs from tax-deferred accounts by the deadline.

You will pay taxes on the distribution, but the penalty for missing the deadline is 25% plus income taxes on the amount. The penalty can be reduced to 10% if you correct it quickly.

Did you know that up to 85% of your Social Security benefits can be taxable?

While the One Big Beautiful Bill Act aims to ensure 88% of retirees pay no tax on Social Security income, the thresholds still apply for higher earners.

In 2025, if your combined income after deductions is above $34,000 (single) or $44,000 (married filing jointly), up to 85% of your benefits may be taxable.

Imagine opening your Medicare bill and discovering your monthly premium has jumped by several hundred dollars.

That surprise charge? It's likely an income-related monthly adjustment amount (IRMAA), a surcharge for higher-income enrollees.

The kicker is that this adjustment is based on your modified adjusted gross income (MAGI) from two years ago. If you sold a home, liquidated an IRA, or had other one-time income, you may be facing higher premiums you didn't see coming.

When you or your loved one is sick, the last thing you're thinking of is keeping meticulous expense records. However, failing to record medical expenses carefully is a common mistake that can cost you.

If your unreimbursed medical expenses exceed 7.5% of your adjusted gross income, you can deduct them. This can translate into significant tax relief during expensive health years.

Many retirees hold various retirement accounts, including taxable accounts, traditional IRAs, and Roth IRAs.

These accounts are taxed differently. How you time your withdrawals can have a major impact on your tax bill. For example, taking too much from an IRA in a year when you have other income can push you into a higher tax bracket.

You want to sequence withdrawals to minimize your tax burden throughout retirement.

Tax-loss harvesting is a smart move that can save you money.

If you owe capital gains from the sale of a winning investment, you can offset some of those gains by selling a loser.

Many retirees ignore their losses, but you can save on taxes and move the money into a different investment. Plus, if your losses exceed your gains, you can use up to $3,000 to offset regular income.

If you have a traditional IRA and like to give to charitable causes, you can donate and save big on taxes.

Retirees 70.5 and older can make a qualified charitable distribution (QCD) from their traditional IRA. This means you donate directly from your tax-deferred retirement account to the charity and avoid paying taxes on that withdrawal. If you're over 73, it can count toward your RMD.

How tax-friendly is your state? Not having any state income tax is great, but if you're paying higher property, sales, or estate taxes, you may not come out ahead.

Before selecting your ideal retirement state, consider how your specific types of retirement income, such as Social Security, traditional IRA/401(k) withdrawals, Roth IRA withdrawals, pensions, and investment income, will be taxed, along with the impact of other state taxes.

You worked hard and saved so you can enjoy your retirement, but it's also nice to have something to pass along. With some thoughtful planning, you can reduce the taxes your heirs pay.

Tactics include annual gifting within IRS limits, establishing irrevocable trusts to exclude assets from your estate, and using irrevocable life insurance trusts (ILITs) for tax-free life insurance payouts. These can slash the taxes your heirs pay.

When you convert a traditional IRA to a Roth IRA, you'll pay taxes on the funds. However, everything you earn after the conversion is tax-free as long as you're making qualified withdrawals. You also avoid RMDs.

This conversion makes the most sense if you can do it in a lower-income year or over several years, so it doesn't boost you up into a higher tax bracket.

Your "cost basis" refers to the amount you paid for an investment. When you sell stocks or other investments, you owe capital gains on the profit.

If you don't have a record of your cost basis and can't get one from your brokerage, the IRS may assume your cost basis is zero. That means you could pay unnecessary capital gains on the entire sale price, rather than just your profit.

Tax planning in retirement isn't a set-it-and-forget-it process. Keeping the most money in your pockets means staying proactive.

It's worth the effort to lower your financial stress. Even if you save an extra 1% of your retirement income, which it's often much more. If your retirement income is $50,000 to $80,000, those savings mean an extra $500 to $800 a year in your pocket.