IRS Has Special Tax Warning for Retirees
By Alan Olsen
The warnings are out there. Are you paying attention? If you’re a retiree then you better listen up. All year long the nation’s top tax agency has been encouraging taxpayers to check their W-4s, and update them if necessary, to ensure they have the proper withholding amount. The IRS wants to make sure that taxpayers are withholding enough so they don’t end up with a nasty tax surprise next year. At the same time, taxpayers don’t want to withhold too much, either. Yes, people who withhold too much will get the money back when they file their returns, but that’s more money they could have had throughout the entire year.
Retirees Need to Withhold the Right Amount As Well
Well,it turns out the IRS’s warning is not just for the employed. That’s right. The IRS wants to get the word out to retirees that they need to be aware of this same issue. Their warning: make sure you’re withholding enough taxes from your annuity or pension, or you will pay. In other words, you will getan unexpected bill come tax season next year.
Are You Ready for Estimated Payments?
This is not always easy. When you’re employed, your taxes are automatically withdrawn from your paycheck. You never have to worry about it. Whenyou’re retired, you actually have to make an estimated payment, usually by writing a check. These are due four times a year and retirees often forget to make them. A great way to avoid this situation is by setting up automatic payments. Then you know theywill get paid on time and for the right amount. Use a Form W-4 and the IRS’s withholding tables to determine the correct amount.
Understand Your Entire Income Picture
You also need to know and understand your entire income picture so you don’t under-report your income. That means in addition to your pension and annuities, you need to be aware that your Social Security benefits could also be taxed. One option is to use Form W-4V and withhold a flat rate from each check, depending on how much you receive and your adjusted gross income.
Set Up Automatic Payments
When it comes to annuities and pensions you can also set up automatic withholding so you don’t forget to make the payments. This makes life a lot easier. Notonly does it happen automatically, but it also helps you pay the right amount. Justuse Form W-4P to determine the right number of allowances. The more allowances you choosethe less money will be withheld.
Use Your Retirement Account Distributions
Another option to make your payments is to use the money from your required minimum distribution from your retirement account and pay your tax bill at the end of the year. All you need to do is inform the custodian of your retirement savings that you want to withhold taxes from your required minimumdistributions. By doing that the IRS knows to treat the situation as though you have been paying your taxes throughout the year.