Retirees face a big tax surprise if they haven’t withheld enough from their pension or annuity income, the IRS has warned, noting the penalty for failing to pay the proper amount of estimated taxes.
With tax reform bringing about major changes for the year ahead, the IRS embarked on an awareness campaign, and last week started telling retired filers to ensure they avoid an estimated tax penalty.
The Tax Cuts and Jobs Act, which went into effect in December, drastically altered how tax is calculated, not just for regular taxpayers but retirees as well.
As a result, the majority of taxpayers have to change the amount of tax paid during the year, and retirees receiving monthly pension or annuity checks may have to alter the amount of federal income tax they have withheld accordingly, the IRS noted.
While working, taxpayers automatically pay their withholding with each paycheck, but retirees now have to write checks four times a year to the IRS, CNBC reported.
“With estimated tax payments, there’s the issue of making sure they actually paid the tax,” said Harjit Virk, a CPA and senior associate at Getzel Schiff & Pesce in Woodbury, New York “Sometimes you have to send reminders when the payments are due.”
Jonathan Zimmerman, a benefits attorney with Morgan, Lewis & Bockius, noted that circumstances for pensioners payments and filers vary widely, making it difficult to estimate who is at risk of not withholding enough, according to the Wall Street Journal.
He explained that income doesn’t just drop after retirement and that certain types of retiree income may be taxable, such as part-time work, Social Security payments, or retirement-plan withdrawals.
According to Gil Charney, a director of H&R Block’s Tax Institute, “the onus is on the taxpayer to make sure the withholding is correct,” which is why the IRS now offers a new withholding calculator for taxpayers and retirees to calculate how much to withhold.
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