The way taxes are calculated changed considerably after the implementation of the Tax Cuts and Jobs Act. Our tax attorneys can quickly confirm that even retirees must be mindful of these changes in order to avoid an unexpected tax bill. The new law included many modifications, such as the discontinuation or limitation of certain deductions, different tax rates and brackets, the removal of many personal exemptions, and an increase in the standard deduction.This resulted in numerous filers needing to lower or raise the amount of taxes they pay throughout the year.
Confusion May Await for Newly Retired Individuals
If you are new to the retirement game, you may be unaware that retirement-related tax forms have substantially changed. If so, you may find yourself caught short on the amount you have withheld for taxes from annuities, pension checks or similar payments. If so, you may have to modify the amount of federal income tax that is withheld from these income sources.
The fact that you may have a higher standard deduction may also be overlooked if you are unfamiliar with the new tax regulations. For example, the new standard deduction is $12,000 per year for singles and $24,000 per year for married couples. If you are retired, however, your standard deduction may be even higher. This is because an additional standard deduction applies to anyone who is 65 years of age or older, or who is legally blind.
On the other end of the spectrum, you may inadvertently find yourself owing taxes, if enough money was not deducted from payments you receive from investments. This is particularly true if you have retirement income from several sources, such as pension checks from different jobs, a 401(k) plan, or even income from a part-time job you have taken during retirement.
Automatic Withholdings Not an Automatic Safeguard
Generally speaking, income tax is withheld from your annuity or pension payments unless you give specific instructions that you do not want any taxes withheld. Nevertheless, if you are retired and failed to review your specific situation, you may be required to pay additional taxes you did not realize you owed.
For example, one point to consider, early distributions are sometimes subjected to a penalty of 10 percent, unless a specific exception applies. A tax attorney can help you sort out what may be confusing concerning these matters, as well as the new tax regulations in general.
IRS Launches Tax Withholding Estimator
If you have heard of the new tax withholding estimator offered by the Internal Revenue Service, you may mistakenly think it is only for those who are still on the job. Fortunately, however, the estimator can help retirees also by directly linking to the W-4P form-the certificate of withholdings for annuity and pension payments. With this tool, you can obtain a precise withholding recommendation by using the estimator to evaluate your personal tax circumstances.
Of course, your tax situation can change year to year, even in retirement. Therefore, you may want to have one of our qualified tax attorneys review the amount you are having withheld from pensions, investments or other income sources. In addition, if you change your withholding later in the year, it is imperative to schedule another evaluation in January to ensure enough is being withheld for 2020. Ultimately, planning ahead and discussing your options with a professional are the best ways to avoid unwelcome surprises.