September 21, 2018 / 10:02 AM / 8 months ago

COLUMN-New U.S. tax law could create underpayment headaches for retirees

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Mark Miller
    CHICAGO, Sept 21 (Reuters) - The U.S. Internal Revenue
Service hoisted a big red-flag warning to retirees earlier this
month: take a look at how much income tax you are paying
throughout 2018, because the amount could need an adjustment in
the wake of the new federal tax law.
    The Tax Cuts and Jobs Act of 2017 (TCJA), signed into law by
President Donald Trump last December, made important changes to
tax rates, brackets, deductions and exemptions that affect all
taxpayers. Retirees need to pay special attention to income
coming from tax-deferred retirement accounts, pensions and
annuities. 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. 
    Failing to pay the right amount through the year could
subject you to a penalty next April when your federal income tax
return is filed. The penalty is determined by multiplying an
interest rate, determined by the IRS, by your underpaid amount;
the current interest rate is 5 percent. Taxation of retirement
income by states is all over the map (,
but your state tax return also could be impacted.
    The IRS issued a bulletin earlier this month urging retirees
to do a check-up on amounts that are being paid in quarterly
installments or withheld ( Taxes are due
throughout the year, either through quarterly estimated
payments, or through withholding by pension plan sponsors or
annuity providers. Taxes also are owed on Social Security.
    The TCJA marks the first major revision of the tax code
since 1986. It reduced tax rates and expanded income tax
brackets. The standard deduction nearly doubled from $12,700 to
$24,000 for married couples filing jointly, and from $6,350 to
$12,000 for single filers. But the standard deduction actually
is higher for most retirees, because taxpayers older than 65 can
deduct an additional $1,300. In addition, the TCJA caps
deductions for state and local income and property taxes at
$10,000 for both married couples and single individuals, and
personal exemptions were eliminated.
    You may need to increase or reduce the amount of tax being
paid during the year - and there is still time to make an
adjustment before the year ends. “There are enough moving parts
here that the only way to get the right answer is to run a
projection,” said Greg Rosica, partner in EY's private client
services practice in New York City. 
    One way to avoid a penalty, Rosica notes, is to base your
payments on the prior-year taxes and pay “at least 100 or 110
percent of that amount.” Another way is to project the amount
you owe for the current year and pay at least 90 percent in four
quarterly installments. (The final quarterly payment for 2018 is
due on Jan. 15, 2019.)
    The third method is annualized income installment. This is
used by taxpayers who receive uneven levels of income throughout
the year; this approach smoothes the amount owed quarterly using
a reasonable estimate of your income for the year. For more on
this, see Chapter Two of IRS Publication 505. (
 For retirees who receive a monthly pension or annuity check,
this may mean changing the amount of federal income tax they
have withheld. 
    If you are underpaying on income that requires quarterly
payments, send in the unpaid amount as soon as possible to stop
underpayment penalties from accruing. If additional payments are
due on income that is withheld, contact your former employer to
make a change. The IRS cautions that due to the limited amount
of time remaining this year, you might need to cover this type
of expected tax liability through an additional direct tax
payment, as you would a quarterly payment.
    Higher-income retirees also pay taxes on Social Security
benefits. The TCJA does not change the formulas for taxation of
benefits, but Social Security income does figure in to your
total income tax liability as determined by the federal tax
    Social Security beneficiaries receive a form from the IRS
during tax season (Form SSA-1099) that reports net benefit
subject to tax after Part B Medicare premiums have been
subtracted. No taxes are paid by beneficiaries with combined
income equal to or below $25,000 for single filers and $32,000
for married filers; above those levels, tax is determined
according to two income tiers. (
    The IRS notes it is possible to ask the Social Security
Administration to withhold tax on benefits at one of four flat
rates as part of an overall withholding plan; you can initiate
withholding by filing IRS Form W-4v.
    Unsure of whether your withholding or quarterly payments
should be adjusted? Rosica advises consulting an accountant, or
using an online tool to analyze your situation. The IRS website
offers a withholding calculator that offers a good start (
 You will want to have last year’s tax return handy, and records
of how much you have withheld or paid so far this year.

 (Reporting and writing by Mark Miller in Chicago
Editing by Matthew Lewis)
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