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How the new tax law affects your withholding

Created date

October 22nd, 2018

For the last several months, the Internal Revenue Service (IRS) has been running an awareness campaign urging taxpayers to check their withholding to make sure they’re paying the right amount of tax. The campaign is in response to recent federal tax reform.

“The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including retirees,” IRS officials said in a press release.

As part of this campaign, the IRS recently issued a warning specifically for retirees, urging them to make sure they’re paying enough tax during the year to avoid a penalty at tax time. Taxpayers can use the IRS’s Withholding Calculator online at IRS.gov (click on the Pay tab) to make sure they are having enough money withheld from pension income. If the Withholding Calculator indicates you are coming up short, you can fill out Form W-4P (for pension income) and submit it to your pension administrator.

“Like employees, retirees can use this online calculator to estimate their total income, deductions, and tax credits for 2018,” the IRS said in a press release. “As noted in the Withholding Calculator’s step-by-step instructions, retirees should treat their pension like income from a job by entering the gross amount of each payment, how often they receive a payment (monthly, quarterly, etc.), and the amount of tax withheld so far this year.”

Social security

Whether or not you receive pension income, you can also elect to have tax withheld from your Social Security payments. You can do this by filling out a Form W4-V, also available on IRS.gov.

“Unlike wages and pensions, withholding on Social Security benefits and other government payments is voluntary and not based on withholding allowances,” the IRS said in a press release. “Instead, beneficiaries can choose to have income tax withheld at one of four flat rates—7%, 10%, 12%, or 22%.”

If you have income that is not automatically subject to tax withholding, such as money you make by running a consulting business, capital gains from selling stock or real estate, or dividends from stocks or mutual funds, you’re still on the hook for paying those taxes in advance by making estimated tax payments throughout the year. Form 1040-ES, also available on IRS.gov, can help you figure how much you owe on this kind of income.

The U.S. tax system requires most taxes to be paid by the end of the tax year (not the April tax return filing deadline). If you haven’t paid enough before year-end, you could end up with a big tax bill as well as late payment penalties in the spring.

If you want to get an even more accurate estimate of your actual tax liability, Michigan attorney and CPA Paul T. Joseph (paultjosephlaw.com) says the safest way is to complete a pro forma tax return that takes into account the new tax rates and deductions.

“The penalties are a factor of the amount of the underpayment, so the more you are underpaid, the larger the penalty,” Joseph says. “The new act has affected the tax rates by lowering them, but at the same time eliminated some deductions and limited others.”

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