Retirement Pension and Tax Payments

The Tax Cuts and Jobs Act of December 2017 changes the way tax is calculated for retirees, just as it does for most taxpayers. In addition, tax brackets and rates have changed, the standard deduction has increased, personal exemptions are gone, and some deductions have been reduced or eliminated.

Even though you’re no longer receiving employment income, the Internal Revenue Service advises that you review your tax situation to avoid surprises come April 2019. While there’s no guarantee that you’ll owe money, received a refund or even see a change, it’s a good idea to estimate your taxes now to stay on top of your financial picture.

The IRS Withholding Calculator

Though designed mainly for those who receive employment income and W-2 forms, the IRS Withholding Calculator also serves as a tax estimation tool for retired taxpayers. It can account for pension income as well as money earned through a job. You can find the IRS Withholding Calculator on this page.

Preparing to use the calculator makes quick work of tax estimating. Minimum preparation includes gathering recent records of pension payments, amounts of tax already withheld this tax year and last year’s tax return. You can estimate amounts, but the most accurate results depend on accurate data. Re-run your calculations through the withholding calculator at any time that your financial circumstances change.

You can also use the withholding calculator as a “what-if” tool. You don’t need to worry about tipping your hat or feeding bad information to the IRS. The withholding calculator doesn’t ask for or store information that can be used to identify you directly, so if you want to see what your tax situation would be as a billionaire, you can without worry that agents will come to audit your non-existent offshore accounts.

If you still have self-employed income, are subject to alternative minimum tax or have other, more complex tax situations, the withholding calculator may not be accurate for your case. See IRS Publication 505 in this case.

Making Changes to Withheld Tax

If the calculator gives you an estimated number that’s dramatically different than the tax you’re paying now, you’ll need to complete a new Form W-4P, the pension income version of Form W-4. Generally, claiming more allowances lowers the amount of tax taken out, lowering the amount you’re currently paying, while claiming fewer allowances raises the amount of withheld tax, increasing your overall tax payment.

Submit your revised Form W-4P to any pension payors so that they can adjust tax withholding as soon as possible. If you’re estimating tax mid-year, remember that the withholding calculator looks at the entire year, so you may not have enough time to catch up. While this isn’t a big problem if you’ve been overpaying, underpayment can leave you with a big bill come tax time.

Remember that the U.S. tax system operates on a pay-as-you-go basis, so all taxpayers are expected to pay most of their tax burden through the year. Settling a large tax account at the end of the year may lead to tax penalties.

Estimated Tax Payments

If you have a large amount of tax owing and changes to withholding won’t eliminate this amount by tax time, you can make payments through the year. Form 1040-ES helps you calculate estimated tax payments. This is especially handy, given the tax changes on tap for the 2018 tax year. When you’ve determined what your estimated mid-year payments should be, you can use IRS Direct Pay or the Electronic Federal Tax Payment System, from the Treasury Department

You can also direct Social Security to withhold taxes from your payments. This is voluntary and not subject to typical withholding allowances, but rather uses one of four flat rates: either 7, 10, 12 or 22 percent. Use Form W-4V to make this request.

About Paul Gaulkin

Paul Gaulkin is enrolled with the US Treasury to practice before the IRS. Mr. Gaulkin possesses technical knowledge in the process of securing relief for taxpayers in need of tax help. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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