Because a lot of retirees are on a fixed income, paying taxes can feel like a considerable burden. Implementing some savvy tax planning strategies will protect your finances when it’s time to file a return. If you’re getting ready to leave the workforce, here’s what you should know about paying taxes in the coming years.

How to Make Your Tax Obligations More Manageable After You Retire

1. Stay on Top of RMDs

Required minimum distributions (RMDs) are mandatory withdrawals you must take from retirement accounts after you reach 70½ years old. These distributions affect 401(k)s, traditional IRAs, and any other employee-sponsored accounts you may have. Failing to take the RMDs will result in a penalty that equals 50% of the amount you should have withdrawn come tax time. To avoid such a huge hit every year, transfer these funds diligently, even if you don't need them yet. 

2. Make Quarterly Estimated Payments 

If taxes are not withheld from your retirement account distributions, you’ll have to make quarterly estimated payments. Otherwise, you could be subject to a hefty penalty—and a massive tax bill—at the end of the year. If you were self-employed over the course of your career, you may already be familiar with quarterly estimate tax planning. If not, these payments are usually due around April 15, June 15, September 15, and January 15 every year. 

3. Track Medical Expenses

Retirees may deduct unreimbursed medical expenses if they exceeded 10% of their adjusted gross income for the 2019 tax year. If medical expenses are your only allowable deduction, itemizing may not make sense. However, if you have other expenses to deduct, such as mortgage interest, itemizing could yield the lowest tax burden or the highest refund. 

For tax planning strategies that are tailored to your situation, turn to Daren Katayama, CPA, LLC in Kailua Kona, HI. This locally owned and operated accounting firm is proud to serve individuals on the western side of the Big Island, helping them manage every significant life change. Their knowledgeable team can help you navigate even the most complicated tax laws. To schedule an appointment, reach out on their website or call (808) 329-6635.