You’d think that filing taxes would get easier over time but unfortunately for retirees this just isn’t the case. In fact, many retirees will face additional hurdles in their tax filing as a result of new sources of income and special deductions. Here we provide some tax filing tips to help retirees overcome the most common difficulties in filing their post-retirement returns.

Advantageous Tax Breaks

When it comes to retirement income, how you withdraw funds during retirement from various savings vehicles can directly impact your taxes. Here are a few pointers to save on taxes:

• Only take the required minimum distribution (RMD) from your Traditional IRA if possible.
• Use taxable accounts (individual, joint, trust) for withdrawing retirement funds.
• Make quarterly tax payments to the IRS to avoid underpayment penalties.
• Be cautious of taking funds from your pension, 401(k) and annuity accounts as this is typically taxed as ordinary income.
• Selecting Social Security early or at normal retirement age will likely effect your taxable income in a given year.
• Direct transfers from your IRA to a qualified charity can help avoid income tax on the IRA distribution — and the withdrawal counts toward satisfying your RMD requirement. (Being generous has never been more (financially) rewarding! See Give To Charity; Slash Your Tax Payment .)

When you stop working, you’ll have to take a serious look at your situation to determine if you should itemize your deductions or simply take the standard deduction. Upon reaching age 65 or older, you’ll receive an additional standard deduction allowance (on top of the regular standard deduction amount) if you elect not to itemize your deductions. For 2010, the additional amounts are $1,400 for a single filer and $1,100 for a married or qualifying widow(er) filer. In addition, if you or your spouse is legally blind, you’ll each receive another $1,100 allowance ($1,400 for single filer).

Some deductions such as medical expenses, long-term care premiums, mortgage interest, investment and property losses, and charitable contributions might be higher or the same during retirement. Therefore, you might want to continue to itemize your deductions on your federal tax return if your specific deductions exceed the standard deduction limits. (The receipts you cram into your wallet could be replaced with cash come tax season. Check out 10 Most Overlooked Tax Deductions .)

Credit for the Elderly or Disabled

You might be able to reduce your federal income tax by claiming the Credit for the Elderly or Disabled. The primary qualifications include the following:

• You’ve reached age 65 or have suffered a permanent and total disability prior to age 65 while collecting taxable disability income.
• You’re a U.S citizen, resident alien or a non-resident alien who is married to a U.S citizen.
• Your adjusted gross income (AGI) is below $25,000 (married filing jointly) or $17,500 (single filer).

The actual computation of the credit is a pretty simple five-step process. However, it goes beyond the scope of this article and requires the use of an IRS filing status table to determine the starting amount used in the calculation. (Also check out Give Your Taxes Some Credit .)

Taxation of Social Security

While it’s nice to have some additional supplemental income during retirement, it’s important that you fully understand how earned income and tax-exempt interest can affect your Social Security benefits. If you’re married filing jointly and your provisional income exceeds $32,000 ($25,000 for single filers), then a portion of your Social Security benefits will be subject to federal tax.

Provisional income is the total income shown on your return (earnings from a job, interest, dividends, etc.) plus 50% of your net Social Security benefits, plus tax-exempt interest or certain tax-exempt fringe benefits or exclusions.

For example, Jim and Mary are both 68 years old and are retired. They file a joint return. Jim works a part-time job paying $12,000 per year. They have $7,000 in taxable interest/dividends and $15,000 in tax-exempt interest from municipal bonds. Combined, their net Social Security benefits are $18,000. Their provisional income is $43,000. This exceeds the $32,000 limit, so part of their Social Security benefits will be taxable.

To compute the exact amount of your taxable benefits, you should refer to IRS Publication 915. (Find out how to determine whether the tax exemption offered by munis benefits you in Weighing The Tax Benefits Of Municipal Securities .)

Avoiding an Audit

While the odds of an actual tax audit are still fairly low, the IRS has increased the number of audits of high-income taxpayers, schedule C filers (business profit or loss), partnerships. corporations. those who use tax shelters and S corporations. Many audits result from errors or omissions in the recording of figures, itemized deductions and other expenses exceeding IRS targets, as well as excessive tax-shelter losses. Double checking your return for errors and avoiding excessive deductions could help avoid most audits. Here are a few record-keeping tips:

• Create envelopes or a filing system for bills and receipts for each category (such as charitable contributions. medical expenses, home loan mortgage interest, IRA records, 1099s, and so on).
• Get in the habit of keeping a list of deductible items as they occur.
• Keep a ledger of expenses to record deductible items.
• Retain account statements, credit card receipts and canceled checks as permanent records.

The Bottom Line

Filing your taxes during retirement can be just as time consuming as when you were employed, so you’ll still need to keep an organized filing system for all of your tax documents to help you better determine whether to itemize your deduction or take the standard return. Preparing for your tax filing can be simple if you work to stay organized throughout the year, and keep abreast of changes to tax laws that could affect your deductions and credits.