With the looming possibility of Congress not extending the Trump Tax Cuts (TCJA) for individual taxpayers, those nearing retirement or already retired might find themselves facing increased tax burdens come January 1, 2026. Neglecting to strategize for higher taxes could mean handing over a larger portion of your retirement funds to Uncle Sam without even realizing it.
Ignoring the Potential Rise in Individual Tax Rates
As federal tax rates revert to pre-2018 levels, you could find yourself shelling out an extra 1% to 4% in personal taxes. Moreover, changes in everything from the Standard Deduction to the Child Tax Credit could further impact your tax obligations. Since federal retirees are subject to income taxes on various fronts, including their FERS annuity, Social Security, and withdrawals from traditional Thrift Savings Plans (TSP), it’s crucial to plan ahead for potential tax hikes as retirement approaches.
Neglecting to Adjust Tax Withholdings During Retirement
A hefty tax return isn’t cause for celebration; it often indicates a need to adjust your withholdings. The same goes if you end up owing taxes upon filing. Retirement brings significant changes to tax withholding compared to your working years. Ensuring that your withholding covers all taxable income, including FERS pension, traditional TSP distributions, and Social Security, is essential. Additionally, depending on your state of residence, your federal retirement income may be subject to state taxes.
Misunderstanding Required Minimum Distributions (RMDs)
While RMDs from traditional TSPs for federal retirees are relatively straightforward, the same cannot be said for retirement plans from private-sector employment. When RMDs come into play, especially for married couples with separate retirement plans, it’s crucial to navigate IRS rules diligently. With Defined Contribution Plans like TSPs and 401(k)s, each spouse must calculate and withdraw RMDs separately from their respective accounts to avoid penalties.
Overlooking Itemized Deductions for Out-of-Pocket Expenses
Under the Trump Tax Cuts, the standard deduction nearly doubled, leading many taxpayers to opt for this route. However, with the expiration of these cuts looming, itemizing deductions may become more beneficial, especially if you have substantial out-of-pocket expenses such as long-term care and medical costs not covered by insurance.
Consulting with an FRC® trained advisor can link you with a seasoned tax professional well-versed in federal benefits, ensuring your retirement tax planning is on track.
