Taxes in Retirement

[TommyIV]

Tis the season... well almost.

This article does not directly allude to the Thrift Savings Plan but much is the same. I figured I'd share to warm up our brains on upcoming tax season and planning our tax strategies for next year. And honestly, who doesn't love reading about taxes? :cheesy:

The unpleasant surprise waiting for you when you retire? Taxes (https://www.marketwatch.com/story/the-unpleasant-surprise-waiting-for-you-when-you-retire-taxes-2019-12-20?mod=newsviewer_click)

[PessOptimist]

I'm not sure this is the correct thread for this but people will see it. Call it a tip or a warning. If you start a TSP withdrawal or SS payments later in the year, you automatically will have no fed tax withholding for that year. You can force some withholding at the time but I did not. I knew I would owe the IRS this year but failed to realize how fast it adds up and that of course IRS would charge a penalty for underpayment of taxes. $118 in my case.

PO

[Scout333]

PO, you can try writing a letter to get the underpayment penalty waived. Explain why it happened and that you have corrected your withholding so that it won't happen again this year. Works a pretty high percentage of the time. Good luck!

[PessOptimist]

Working on it. Just wanted to let everyone know how fast taxes add up. Of course if I was in the 12% bracket it would be less but then I wouldn't be so fortunate would I?

PO

[PessOptimist]

PO, you can try writing a letter to get the underpayment penalty waived. Explain why it happened and that you have corrected your withholding so that it won't happen again this year. Works a pretty high percentage of the time. Good luck!Went through the form 2210 worksheet and checked the box about when withholding was with held. Worth a shot as the lump sum leave payment in January had a healthy chunk of withholding. Reduced the penalty by a whole $36. I am not sure the letter and delay would be worth $82. I will sleep on it for a while. Taxes are not due for almost two months so no particular hurry. I have not yet corrected the withholding, trying to figure out which payment or payments to do it with. I am so lucky to have so many sources of income in retirement.

Once again a reminder to all, that withholding amount is important on any income received. It adds up real quick.

PO

[Scout333]

Went through the form 2210 worksheet and checked the box about when withholding was with held. Worth a shot as the lump sum leave payment in January had a healthy chunk of withholding. Reduced the penalty by a whole $36. I am not sure the letter and delay would be worth $82. I will sleep on it for a while. Taxes are not due for almost two months so no particular hurry. I have not yet corrected the withholding, trying to figure out which payment or payments to do it with. I am so lucky to have so many sources of income in retirement.

Once again a reminder to all, that withholding amount is important on any income received. It adds up real quick.

PO

PO, It has been awhile since I looked at the Form 2210 but it is fairly quirky and worth checking the exceptions. For example, if you paid in at least as much as you paid in the prior year you can sometimes avoid the penalty entirely. it also allows any W-2 withholdings to be treated as if they were paid equally throughout the calendar year it applies to. i.e. 2019 calendar year instead of the actual pay date it was withheld on. This sometimes can reduce the penalty amount. Sounds like you may already have tried the exceptions but it is definitely worth looking at them. Best of luck!

[Kdjs]

Just received my notice for my first full retirement annuity payment starting March 1st. Next will have to calculate Federal Withholding & State Withholding.Also, I had to call to have Long term insurance paid from annuity and have my pre tax and post tax amounts along with my Vision and Dental amounts paid for tax purposes.
Lots to keep up with.

[Maricar19]

Question: If expected tax deficit ($4000) for taxable year 2021, is paid by November 2021, will that be acceptable to IRS?

[evilanne]

Maricar,

It really depends on your situation, but if you know you are going to owe an additional $4K, you should make estimated payments throughout the year. I find it easier to adjust my retirement withholdings or make a payment on IRS.gov if I know I am going to owe more than $1K

Generally, if you have paid/withheld 100% of last year's taxes or 90% of the current year's taxes you can avoid the underpayment penalty but see https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty, which states "The penalty may apply even if we owe you a refund."

[Sevelyn]

I'm facing a disaster this year. Not only do I owe for last year's taxes on most of the pension and SS, but I will likely have to do estimated payments for 2023. That is the equivalent of two year's taxes in one year. I am facing perhaps having to tap the TSP as monthly payments but that means essentially I'm tapping the [taxable] TSP just to cover taxes. I'm definitely in a hole. I went to my account w OPM just now and do not know how to change my exemptions. I may just tell them to withhold more, but that means less money to cover the huge tax bill. It's just a mess and I'm at a loss. Consider it a very painful lesson learned. I'm facing 2023 w spending absolutely nothing to make room to cover the 2022 taxes, maybe $10K-15K both Fed and State, and to prepare for the 2023 tax note. Signed, SOS

[Scout333]

Ouch! Suggest fixing the 2023 problem first. Then, if you don't have the money to pay all of 2022 at once you can write IRS and propose a payment plan. Surprisingly, they will often accept a reasonable repayment plan as long as you are current. Good luck!