The IRS is trying to make it easier for retirees to figure out how much should be taken for taxes from their pension payments and Social Security benefits.
The federal agency recently unveiled a new Tax Withholding Estimator. The tool replaces the Withholding Calculator that was previously available on the IRS website.
As is generally the case for workers and their paychecks, retirees should withhold the correct amount of taxes from their retirement income if they want to avoid a surprise bill from Uncle Sam — and possible penalties — on Tax Day.
If you’re a retiree and determine that you should change the amount of taxes that are being withheld from your Social Security payments, you can learn how to make that change in “An Easy Way to Avoid a Tax Day Bill on Your Social Security Income.”
To check your withholding using the new IRS tool — whether you’re a retiree or a worker — you’ll have to answer six steps worth of questions about personal details, such as:
- Marital or filing status
- Income
- Withholding
- Adjustments
- Deductions and credits
The IRS is also touting several other features of the Tax Withholding Estimator.
For example, the agency says the tool uses plain language intended to make it easier for taxpayers to understand what is being discussed. The estimator also has a mobile-friendly design and other new features.
According to the IRS, the tool can be especially helpful to specific groups of taxpayers:
“People most at risk of having too little tax withheld include those who itemized in the past, but now take the increased standard deduction. They also include households with two wage earners, employees with non-wage sources of income and those with complex tax situations.”
The IRS also notes that some taxpayers might not benefit from using the estimator. They include people who owe the alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.
The agency encourages such taxpayers to instead use the instructions in Publication 505, Tax Withholding and Estimated Tax.
Lowering your Social Security taxes
Once you realize how much you must pay in Social Security taxes, you might start thinking about the best ways to avoid those costs.
Doing so isn’t easy, unfortunately. And it’s especially tough in a handful of states, where Uncle Sam isn’t the only one dipping into your pocket. To learn more, read “These 13 States Tax Social Security Income.”
However, “difficult” is not the same thing as “impossible.”
As we report in “5 Ways to Slash Your Tax Bill as a Retiree,” there are several ways to trim your tax bill in retirement — including delaying claiming your Social Security benefit:
“There are several ways to avoid (taxes on Social Security income), but perhaps the easiest is to simply delay claiming your Social Security benefits. In fact, if you wait until you are 70, you can significantly boost the size of your monthly Social Security payment as well.”
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