30 Oct IRS To Retirees: Check Your Withholding Now Or Run The Risk Of Tax Penalties
Tax time is fast approaching. If you’re a pensioner or retiree, you may be in for a big tax surprise if you didn’t review and adjust your withholding’s earlier in the year. The tax code underwent a major overhaul because of a new tax law enacted by Congress in December 2017 (ie: Tax Reform). Some of those changes are beginning to affect retirees’ tax liabilities. To avoid tax penalties, the IRS directed taxpayers to check their withholding’s.
The announcement was aimed at retirees to ensure that they don’t face a surprise tax bill come April 2019 — and to make sure that the right amount is withheld from retirees’ paychecks this calendar year.
Failure to withhold enough money for taxes may result in a penalty. The alert is part of the agency’s efforts to bring attention to its “Paycheck Checkup” campaign, an initiative to draw taxpayers to its online withholding calculator to verify if they are withholding the right amount for taxes.
For retirees who receive annuities or pension paychecks, the IRS has warned that they may need to adjust the amount they withheld for federal income taxes. If you’re not withholding enough out of your paycheck for taxes, you may owe, and that can result in a penalty.
The new tax reform brings lots of changes to tax codes including an increase in the standard deduction, new tax rates, brackets, elimination of personal exemptions, and discontinuation or limitation of certain deductions. These changes impact many taxpayers and as a result, many will need to raise or lower the amount they withhold for taxes.
The IRS calculator was primarily designed for wage earners, but retirees can also use it to calculate their deductions, tax credits and income for 2018. The IRS advised that when using the calculator, you should treat your pension as if it’s income from your job. To do that you will enter the total amount of each payment, the interval at which you receive payments — say monthly or annually — and the total amount of tax withheld from your paycheck this year.
Due to last year’s tax cut, some pensions are now larger than before, meaning that some people will pay more in taxes. The pay rise also means that many people risk under-withholding, which can lead to a penalty. To avoid this, you should check to see if you’re withholding the right amount and make an adjustment if necessary. If you can’t cover your tax bill through withholding, you can make additional payments directly to the IRS.
To make withholding easier and to help retirees avoid tax penalties; some states have enacted mandatory withholding on IRA distributions. Connecticut is one of the states that have mandated withholding on annuities, pensions, and IRAs at 6.99% rate. You can file CT-W4P with your account manager if you want to reduce the default withholding amount.
Another option for paying into the system is to ask the Social Security Administration (SSA) to deduct taxes from your Social Security check. You can easily set this up by creating an online account with the SSA. Although the calendar year is near complete – you may want to still use the calculator in order to forecast your estimated tax liability before its time to file taxes.
The point of the message is to ensure you are prepared before tax time – as an April surprise may negatively impact your savings account and disrupt other financial obligations. Have questions? We have answers. Don’t hesitate to reach out to us if you need assistance with your investment or tax planning. Remember, failing to plan is planning to fail. Plan Smarter, Live Better.