IRS: Retirees With Pension Income Should Do A Paycheck Checkup ASAP
IRS TAX REFORM TIP 2018-143
Retirees should do a Paycheck Checkup to make sure they are paying enough tax during the year by using the Withholding Calculator, available on IRS.gov. The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including retirees.
Because of this law change, retirees who receive a monthly pension or annuity check may need to raise or lower the amount of tax they pay in during the year. The easiest way to do that is to use the Withholding Calculator or read Publication 505, Tax Withholding and Estimated Tax. Though primarily designed for employees who receive wages, this online tool can also help those who receive pension or annuity payments on a regular schedule, usually monthly or quarterly.
Taxpayers who do not choose to have taxes withheld from their income should make estimated tax payments. This income includes pension and annuity income, and the taxable part of social security benefits. Estimated tax payments are due quarterly. The remaining due dates for 2018 payments are Sept. 17, 2018 and Jan. 15, 2019. Taxpayers can pay their taxes anytime throughout the year as long as they indicate the tax year and where to apply the payment. They can visit IRS.gov/payments to explore all IRS payment options.
Here are some things retirees should know about their withholding and using the calculator:
Like employees, retirees can use the calculator to estimate their total income, deductions and tax credits for 2018. When using the Withholding Calculator, retirees should treat their pension like income from a job by entering:
o The gross amount of each payment
o How often they receive a payment, such as monthly or quarterly
o The amount of tax withheld so far this year
Before using the calculator, users should have a copy of last year’s tax return. In addition, knowing or having a record of the total federal income tax withheld so far this year will also make the tool’s results more accurate.
Based on the taxpayer’s responses, the Withholding Calculator will recommend the number of allowances a pension recipient should claim. If the number is different from the number they are claiming now, they should fill out a new withholding form. If claiming zero allowances still doesn’t cover their expected tax bill, the tool will recommend asking their payor to withhold an additional flat-dollar amount from each pension payment.
Pension recipients can make a withholding change by filling out Form W-4P, and giving it to their payor. The IRS urges retirees to submit Forms W-4P to their payors as soon as they can. This gives payors time to apply withholding changes to as many payments as possible this year.
Because of the limited time left in 2018, some retirees may be unable to adequately cover their expected tax liability through withholding. In that case, a taxpayer could instead make an estimated or additional tax payment directly to the IRS.