Tips For Tax Payments As A Retiree

Posted by: Brookside Admin

Retiree looking at finances

When you're employed and receiving a salary, you're subject to mandatory withholding. That may not sound like a luxury, but once you experience the alternative where you're expected to make withholding decisions for yourself, you may think differently. In retirement, there are a number of options for how and when you pay taxes on the various forms of income available to you. Correctly navigating those decisions helps to avoid a large tax bill each spring, which can be difficult to cope with on a fixed income. Here are a few tips for spreading that tax liability out throughout the year so you don't end up with a large lump sum owed to the IRS. 

Retirement income withholding

Most retired individuals still receive a form of income. That includes pension payouts, annuity payments, traditional IRA withdrawals and other sources. Taxes will be withheld from these common income sources unless you specifically ask the IRS not to do so. That involves filing Form W-4P. Allowing withholding means your taxes will be spread throughout the year, similar to earning a traditional income, but there are circumstances that make it beneficial to avoid it. Social security benefits are the opposite, however. There are no taxes withheld from those benefits unless you file Form W-4V and request withholding. 

Making quarterly tax payments

Many consider making quarterly estimated payments to be an alternative to withholding, and while that can be true, you may also need to make estimated payments throughout the year even if additional taxes are being withheld. If your tax bill for the year will exceed $1000 after withholding, by the strictest letter of the law you should be making quarterly payments or risk penalties. Form 1040-ES will help you calculate your quarterly payments, but you'll also want to mark due dates on your calendar. The first is January 15th, then April 15th, then 2 months later on June 15th your third estimated payment is due, and September 15th is the last due date. 

Required minimum distributions' loophole

If you have a traditional IRA and are taking required minimum distributions, or RMDs, you may have another option for paying your taxes as a retiree. If the RMD isn't a vital part of your monthly income, for example it isn't necessary to pay bills or keep up your lifestyle, then you can consider taking only one payout in a lump sum at the end of the year. You can withhold enough of that lump sum to cover your tax liability because there are special provisions for RMDs. While you'd typically need to send a check in by the deadlines to make acceptable quarterly estimated payments, IRA distributions are considered paid throughout the year, even if you only receive one distribution. If you can afford it, this may be your best tax payment option. 

Regardless of your situation, the CPAs at Brown Kinion and Company help you navigate your tax liability. Contact us to learn how we can help you.