Are you in for a big surprise at tax time? If you’re about to retire or are newly-retired without a plan for IRS withholding, you could receive a shockingly high tax bill. Although retirement should be a peaceful and relaxing time in your life, a tax issue can really shake things up. Let’s take a look at the most common questions about retirement-related tax issues, so you can be prepared.
Why are Taxes an Issue at Retirement?
Tax issues come up at retirement because your household income is changing. You may have an abrupt decline in income or you may do other things that affect your tax burden, like cash out a 401K or change your investments. If you’re due to receive a pension or annuity check, the IRS will want to ensure that they’re receiving the proper amount in taxes. Many people don’t take the time to think through all these financial factors and calculate exactly how it will affect what they owe the IRS.
What Can I Do to Prevent a Problem?
The IRS doesn’t want to leave taxpayers high and dry on this issue. They want to make sure you pay your taxes. That’s why they offer tools like the IRS Withholding Calculator to assist you with the math it takes to make a correct payment. However, it’s not as simple as doing a single calculation. You may need to pay estimated tax earlier in the year than usual, and you may need to provide the IRS with documentation related to a pension or annuity, which is viewed as income.
Is There Still Time This Year to Avoid a Big Tax Bill?
Timing is everything with taxes. As a tax year comes to a close, you might not have time to withhold enough to prevent a large tax bill. But don’t throw up your hands and assume everything will work out next year. This could cause you to incur penalties that increase what you owe significantly. One option is to make an estimated payment to the IRS that helps protect you from a massive tax bill later. Making an estimated payment also shows the IRS that you are dutifully trying to manage your tax burden so you stay in their good graces.
What if I Receive Unexpected Income, Like Capital Gains?
Unexpected income can further complicate your tax picture. Around retirement, unexpected income usually arrives as cash retirement gifts, capital gains on stock, mutual fund dividends, or the sudden sale of a property. You may even have new income from the sharing economy, like opening your home to Airbnb travelers. You’ll owe taxes on all income, even if it’s unexpected. For a complex financial situation like this, you’ll need the advice of a tax attorney to ensure you’ve covered all your bases.
Dutton Legal Group – Indiana’s Tax Resolution Law Firm
The Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.