3 Tax Filing Mistakes for Retirees to Avoid in 2020

2020 was a unique year for taxes. If you’re a retiree, here are 3 tax mistakes you’ll want to avoid when filing in 2020.

3 Essential Tax Filing mistakes for Retirees to Avoid 

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Anthony Saffer  00:00

Tax season is upon us, it may feel a little weird because 2020 was a challenging year, there were lots of tax laws that were passed. But here we are, if you’re a retiree, we want to talk about three mistakes that you’ll want to avoid. Stay tuned.


Anthony Saffer  00:25

Alright Alex, so in 2020, the Cares Act was passed, big tax bill, most people know it for stimulus payments. So number one mistake to avoid is paying taxes on those stimulus payments themselves.


Alex Okugawa  00:36

Yep. Now if you use a tax preparer, if you use a CPA, they’ll likely know not to classify your stimulus payment as income. But if you self prepare, or you do it by hand, just know that that payment is not taxable at a federal level, there’s a little more, it’s a lot more nuanced than that, technically, it’s an advance of a 2020 tax credit. So just keep that in mind.


Anthony Saffer  00:57

So number two, is to avoid paying taxes on your required minimum distributions, which come from retirement accounts if you put them back into retirement


Alex Okugawa  01:06

Exactly. And this rule doesn’t necessarily apply just to 2020. It’ll apply for 2021 as well and apply back to 2019. But it’s especially important for 2020. Because of all the funky tax rules that went on, it was just a really weird year, and people forget what happened. And here’s how it works. In a nutshell, let’s say you took your required minimum distribution from your IRA last year. And then after the cares Act passed, you go, you know what, I don’t actually need this income. So I’m going to return it back. The cares act said, I don’t have to take my RMD for 2020, it was suspended. And so you did that. And the reason you did that is because by returning the RMD back into your IRA, you would avoid taxation on that withdraw. Now what’s going to happen is this year, you’re going to get a “1099R”. That’s a tax form that the custodian will send to you. And on that form, it’s going to say, you know, you took a withdrawal of let’s just say, $15,000, but you returned it back into your account. The tax form isn’t going to pick that up. That’s something that you need to communicate with your CPA, your tax preparer, or if you self prepare, you have to, you know, make a little special marking on your tax return to say, Hey, listen, I know it took a withdrawal out of my IRA, but I returned it within the appropriate amount of time, therefore, it’s not taxable.


Anthony Saffer  02:18

Good, certainly don’t want to pay tax more than you have to. Next. The third one is to avoid paying taxes on a qualified charitable distribution from a retirement account.


Alex Okugawa  02:28

Yeah, this is for our charitably minded clients and folks. So it’s a really savvy tax strategy, and you can give money to a charity directly out of your IRA. People do this to avoid taxation, but you have to be very careful on the reporting of this because again, your custodian when they produce that 1099R that informational return that says how much you withdrew from your IRA. It’s going to show let’s say you gave $10,000 to your church, it’s going to show on there, hey, you know, you took a $10,000 withdrawal out of your IRA. Again, you have to communicate with your CPA, your tax preparer, or if you self prepare to note, yes, this report says I took out $10,000, but I gave it directly to a qualified 501(c)(3) charity, therefore, I don’t have to pay income tax on it.


Anthony Saffer  03:18

So tax forms definitely don’t tell the whole story. You need to know what you did. Make sure you’re communicating with your tax preparer. This is not tax advice. So you certainly want to talk with your tax preparer or your financial advisors. Understand what you’re doing. These are the types of things that we help our clients with in terms of collaborating with their tax preparers, also staying organized and on top of the financial dealings throughout the year. If you’d like to talk with us more, go to our website, give us a call, and talk to you later.

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This is not tax advice. Please consult with your tax professional regarding your specific situation 

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