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Receiving a Pension? IRS Warns You to Check Withholding Now or Face an Unwelcome Tax Surprise Later

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President Donald Trump’s tax cut plan which took effect in 2018 has reduced income taxes for many Americans and is credited by supporters with helping boost the U.S. economy. But hidden in the new law is a potentially unwelcome tax surprise for many retirees, according to your friends at the Internal Revenue Service.

An Unhappy Tax Surprise

We recently found this helpful article by Michelle Singletary, a popular financial columnist, on the pages of the Washington Post. “Tax time will be here before you know it,” she writes. “And if you’re receiving a pension, you may get an unwelcome surprise — a tax bill.” According to Singletary, major changes made to the tax code may affect your tax returns. Because these changes could catch people off guard, “The IRS has issued warnings to taxpayers to check their withholdings” especially if you’re retired and currently receive a check from a pension or annuity. Those who fail to adjust withholding now could face a painful tax surprise later: “If they don’t have enough taken out they could owe taxes and may have to pay a penalty,” the article warns.

Singletary writes that just a few months ago the IRS updated what the agency calls its Paycheck Checkup campaign designed to encourage all taxpayers to check the amount being withheld from their income for tax purposes. “Among other reforms, the new [tax] law changed the tax rates and brackets, increased the standard deduction, removed personal exemptions and limited or discontinued certain deductions,” the IRS said in a taxpayer alert. “As a result, many taxpayers may need to raise or lower the amount of tax they pay in during the year.” The agency says you might be in this group if you’re in any of these categories:

  • You are a two-income family.
  • You have two or more jobs at the same time or only work part of the year.
  • You claim credits like the child tax credit.
  • You have dependents age 17 or older.
  • You itemized deductions in 2017.
  • You have high income or a complex tax return.
  • You have a large tax refund or tax bill for 2017.

Social Security Beneficiaries Also Affected

If you’re confused about adjusting the amount being withheld from your paycheck or pension check, this Withholding Calculator offered by the IRS might prove helpful. A qualified financial adviser can also assist you. But with the calendar year winding down it’s important not to wait, Michelle Singletary writes in her Washington Post article.

Singletary quotes reporter Mark Miller’s article on the Reuters website concerning this topic. “Retirees need to pay special attention to income coming from tax-deferred retirement accounts, pensions and annuities,” he says. “Higher-income retirees may also owe taxes on Social Security benefits. The amount of total income tax you owe could be going up or down, depending on your personal circumstances.”  Singletary also adds that if you’re collecting Social Security you may also need to review how much is being withheld from your monthly benefit. “Many retirees who have a pension are surprised by the increase in their taxes when they start Social Security,” wrote one financial planner. This is especially true if you receive both Social Security benefits and a pension check, since the amount of your Social Security benefits that are taxed depends on other income sources. “If your pension started a few years ago and now you are starting Social Security benefits, you will likely need to increase your tax withholding.”

Pay Now or Pay Later

In general, says the Singletary column, the IRS requires taxpayers to pre-pay 90 percent of the taxes they will owe on April 15th or face a potential penalty. When the new tax law took effect at the start of 2018, it triggered a bump in some pension and annuity payments due to lower amounts being withheld for federal taxes. “This bump-up increases the risk that recipients will be underwithheld at tax time next year,” wrote the Wall Street Journal, “and therefore owe a penalty. To avoid this, retirees should immediately check their withholding and adjust it if necessary.” You may find that everything is okay with your withholding, but if it’s not your window of time to adjust is closing fast. If you need advice on what to do next, contact us here at AgingOptions so we can refer you to a highly qualified, objective financial planner for help.

Comprehensive Advice is the Best Prescription

Financial planning, including tax planning, is extremely important, but it’s only part of the retirement picture. You’ll also want to consider the proper legal framework that will protect your interests. You’ll need to take your housing plans into consideration, not just for today but for your future as well. What about medical insurance – is your plan adequate for your changing needs and those of your spouse? Finally, you should make certain your family understands and will support your wishes as you age. These five facets of retirement – finance, legal, housing, medical and family – are woven together into a retirement plan we call a LifePlan, the most comprehensive retirement strategy we know of. Your LifePlan provides the blueprint to build the retirement of your dreams.

We encourage you to find out more, without cost or obligation, by joining Rajiv Nagaich at a free LifePlanning Seminar at a location and time that’s convenient for you. You’ll find a complete calendar of currently scheduled seminars when you visit our Live Events page where you can register online for the seminar of your choice. We’ll look forward to meeting you!

(originally reported at

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