Many people have likely noticed the numerous warnings coming from the Internal Revenue Service concerning retirees who may be facing an increase in their tax bill next Spring as a result of the new tax laws. The most recent Paycheck Checkup message from the Internal Revenue Service was created for retirees, as this demographic is at a high risk of receiving penalties if they fail to pay the appropriate tax on monies from IRAs, pension plans, and similar sources of income.
Effective since December 2017, The Tax Cuts and Jobs Act significantly altered the way taxes are calculated for retirees and regular taxpayers alike. The new laws eliminated the standard deduction and significantly reduced others, such as local and state tax deductions. Certain personal exemptions were entirely eliminated as well. Ultimately, this means that some retirees will experience an increase in their tax bill.
As a result, many retired taxpayers must change the amount of taxes they pay during the year to avoid an unpleasant surprise in April. Retirees receiving annuity checks or monthly pension payments may also need to alter their federal income tax withholding amount.
The new law has many moving parts, and therefore the only way to know exactly how much a person may owe under the updated guidelines is to “run the numbers.” Otherwise, retirees may face a nasty tax surprise this Spring if enough funds were not withheld from their annuity income or pension. This could result in stiff penalties as well, for failing to submit the appropriate amount of estimated taxes. It is therefore essential for retired individuals to familiarize themselves with the Internal Revenue Service’s new withholding tables.
Many Retirees Left Wondering Where to Start
Numerous retirees are left wondering where to start with regard to changing the way they calculate their taxes. Fortunately, using the Internal Revenue Service’s paycheck withholding calculator is a good place to begin. The tool is fairly uncomplicated and user-friendly.
With this simple calculator, retirees can treat pension income as if it is income from a job, and simply enter the gross payment amount, how frequently it is received, and the amount of tax that was already withheld in 2018. If it becomes apparent that the withholding amount must be changed, a simple document from the IRS called the W-4P form can be given to the person’s retirement plan provider and the appropriate adjustments can be made.
Individual Retirement Accounts
For IRAs, withholding works differently. A person can usually go online to his or her custodian and set the requested withholding rate for both state and federal taxes. If enough has not been paid in federal taxes, withholdings on end-of-year IRA distributions can simply be increased. Some individuals prefer this strategy to making estimated quarterly tax payments.
Social Security
Under the new laws, singles whose adjusted gross income exceeds $34,000 may end up having to pay tax on approximately 85 percent of their Social Security benefits. The same is true for married filers if the aforementioned amount exceeds $44,000. Therefore, some retirees prefer to use a form similar to the W-4P to withhold a flat rate from all checks. This is called the W-4V form, and it allows filers to withhold 7, 10, 12 or 22 percent from each check. This eliminates the need to pay a quarterly amount for taxes.
We advise retirees to plan to speak to their financial planners and tax attorneys to ensure they are making the appropriate adjustments and ultimately avoid any unpleasant consequences this April.