Retirees, Check Your Withholding Now Before an Unexpected Tax Bill Arrives
Social Security, pensions, and withdrawals may affect your total tax bill. Here's how.
Retirees should review their tax withholding before facing a potential surprise tax bill. If they aren't having taxes withheld from their accounts and haven't made quarterly estimated payments, it's crucial to take action to avoid an unexpected tax bill. There are several unique tax situations in retirement, such as multiple income sources, inconsistent withholding, and evolving tax rules.
While working, employers automatically withhold the appropriate amount of taxes from wages, or self-employed individuals pay quarterly taxes to keep up with their obligations. However, in retirement, income may come from various sources like Social Security, pensions, annuities, and rental income, which can add up and result in significant tax obligations.
While it may seem manageable to address the issue when filing taxes early the following year, this approach could lead to a substantial underpayment penalty of up to 7%. Consider a scenario where an individual owes $10,000 in federal taxes for 2026 but has no withholding. Despite planning to pay the taxes by April 15, 2027, the individual may have overlooked the time-sensitive nature of estimated tax payments.
If the first quarterly estimated tax payment should have been made on April 15, 2026, but was delayed by a month, the 7% penalty begins accruing immediately, increasing the overall tax burden. By April 15, 2027, the April 15th payment would be 12 months overdue, further compounding the issue. To minimize the risk of an underpayment penalty, the IRS provides two safe harbors: either pay the correct amount of tax throughout the year or make estimated payments if you expect to owe more than $1,000 in taxes for the year.
An online tool, the Tax Withholding Estimator, can assist retirees in determining whether their current withholding aligns with their overall federal tax bill. Additionally, retirees can prevent underpayment by following tax planning steps, ensuring a smoother and more predictable retirement experience.
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