Planning to retire? Don’t get hit with a surprise tax bill for this common mistake
How much of your salary is withheld from your paycheck affects what you receive, or owe, at tax time – with the wrong number selected, you could be in for quite a surprise.
Retirement Tip of the Week: If you’re planning on retiring halfway through the year, or your income changes while you’re retired with a pension, you may want to adjust your tax withholding now to avoid a hefty bill during next year’s tax season.
There are a few events that may cause you to consider a tax withholding adjustment. Here are a few:
You retired sometime during the year but your spouse is still working.
The sale of a home or stock triggers a large amount of taxable capital gains.
Either you or your spouse begin claiming Social Security.
You’re starting to take withdrawals from your retirement accounts, such as voluntarily or after the required minimum distributions kick in.
You move to another state that has a different income-tax rate.
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Individuals planning to retire, or finding their income changes in retirement, may want to run a tax projection to see how much they’ll owe as a result. “There are a lot of other variables that go into play,” said Rob Seltzer, a certified public account at Seltzer Business Management. “If they’re just starting to take Social Security, then that’s additional income and at least for my clients, it is taxable for the most part, so that would affect them and they would need to either increase withholdings for other income where that’s an option or they would then start having to do estimated payments.”
Look at your current projected income for the year and then compare that to the prior year, Seltzer said. There are tax calculators available to help plan accordingly.
See: Four reasons you could be in for an ugly tax shock
Where applicable, you may want to withhold taxes – such as through paychecks for you or a spouse, or when receiving a pension or annuity.
There’s no standard approach to how much to withhold. Some people prefer to withhold less, so that they get more in their paychecks every month and potentially owe at tax time. Others would rather over-withhold and receive a larger refund when they file their tax returns.
And if the event is an impending retirement, consider reaching out to a tax professional sooner rather than later to prevent any avoidable tax liabilities. For example, if someone retired in March but doesn’t reach out to his CPA until November to share the news of the retirement, that’s eight months where they may have been underwithheld. “You have to do it as it occurs,” Seltzer said.