Retired? Working Part Time? Check Tax Withholding to Avoid a Nasty Surprise
“Millions of Americans receiving pensions could be in for a bad tax surprise next year.”
One item that may have escaped your attention about last year’s tax reform is that many pension payments are bigger, because of the new lower tax rates for 2018. However, that nice surprise may be followed by the risk that you’ll have under-withheld at tax time come spring and be faced with a penalty, says The Wall Street Journal in “Are You Retired or Semi-Retired? Check Your Tax Withholding Now.”
This is similar to what is happening to paychecks for working people. Earlier this year, Treasury officials adjusted the withholding tables to reflect changes for 2018 made by last year’s tax overhaul, so these changes are taking place in both pensions and paychecks. However, the adjustments didn’t include other changes. The current withholding tables include tax-rate changes but not the impact of the $10,000 cap on state and local taxes. The IRS says the tables never included this information.
The result is some pension recipients could end up being under-withheld, because the automatic adjustments to their pension payments set them too high. Most people must pay at least 90% of the taxes they’ll owe during the year or by the next mid-January, if they are paying quarterly estimated taxes in order to avoid paying a penalty. That penalty is based on an annual interest now at 5%.
Pension payments and tax filer’s circumstances vary widely, so knowing who’s at risk is tricky. A typical married pension recipient with a $50,000 pension has a reduction in withholding of about $818 per year. That cuts withholding by 20%: this is no small amount.
A pension payer who follows the government’s tables, isn’t responsible if they are under withheld.
Another challenge: most retiree’s income fluctuates. They may have part-time work some of the time or take retirement account withdrawals. Medical expenses may become big, or shrink, or may become deductible for the first time. Additional standard deductions kick in at age 65. It’s not a straightforward equation.
One expert notes that the responsibility is on the taxpayer to make sure the withholding is correct, not the employer.
To help, the IRS has posted a new withholding calculator. To use it, you’ll need a copy of your 2017 tax return and estimates of your income for this year. You may want to submit a revised Form W-4P, if you find there are changes warranted.
There are a few different scenarios, if you underpay. If income is less than $150,000 and you’ve paid in an amount equal to 100% of last year’s tax, often there is no penalty. If you’re earning more than $150,000, then the threshold rises to 110% of the previous year’s tax. Another is that the IRS sometimes will waive the tax penalties, if this is the year you retired or became disabled. Sometimes the IRS will cut you a little slack. You’ll need to send in Form 2210 with proof and an explanation that the mistake was just that—a mistake.
Reference: The Wall Street Journal (June 22, 2018) “Are You Retired or Semi-Retired? Check Your Tax Withholding Now”