The IRS is not likely to forget you, just because you have left the workforce.
The IRS has been working to make all taxpayers, including retirees, know that they should make sure they are withholding sufficient funds from their pensions and annuities or face some pretty tough penalties, according to CNBC in “The IRS is warning retirees of this impending surprise tax.” However, it’s easier said than done.
Once people leave the workplace, they start drawing down income from several different sources. That usually means Social Security, IRAs, pensions and annuities.
While they were working, they didn’t have to think about income taxes, unless they were self-employed. Their payroll company or HR department took care of that.
Now, they must pay estimated taxes every quarter to the IRS.
There are two issues: making sure you remember to pay the tax on a timely basis and making sure that you pay the correct account. Some accounting firms send their clients reminders. However, that doesn’t always do the job.
How can you make this easier?
There are new withholding tables from the IRS. Speak with your accountant. Make sure you have enough money set aside for quarterly tax payments.
If you’re single and your AGI (Adjusted Gross Income) plus nontaxable interest and half of your Social Security benefits are more than $34,000 (or $44,000, if you’re married), as much as 85% of your Social Security benefits could be taxed. If that seems like a lot, you’re right.
One alternative: use the IRS Form W-4V to withhold a flat rate from each check. Depending on your situation, you can withhold 7%, 10%, 12% or 22%.
If pension or annuity payments are an income source, you can also have taxes withheld from your income, using IRS Form W-4P, and chose the number of allowances you want to claim.
Check with a professional, because it is important you know what you need to pay.
Reference: CNBC (Sep. 12, 2018) “The IRS is warning retirees of this impending surprise tax”