Your obligations to the IRS don’t end when you retire. As long as you still receive a certain amount of income, you’ll be expected to pay taxes on it. However, instead of just filing a tax return at the end of the year like you did when you were working, you may need to make estimated tax payments throughout the year. It’s best to review your finances and tax planning options with a CPA to ensure your tax liabilities are properly taken care of and avoid receiving interest and penalty fees. Below is an overview of what you should know about paying taxes in retirement. 

How Estimating Taxes Works for Retirees

Are You Required to Make Estimated Payments?

Common sources of taxable income for retirees include withdrawals from retirement accounts, Social Security benefits, annuity distributions, and pension payments. The IRS uses a pay-as-you-go system, which means taxes are supposed to be paid as you receive your income. To satisfy these requirements, you must pay quarterly estimated taxes, due in April, June, September, and January. However, there are several exceptions. You won’t earn a penalty for not paying all your estimated taxes if your tax bill for the current year is less than $1,000, you pay at least 90% of what you owe by December 31, or your tax bill in the previous year amounted to zero.

How to Meet Your Tax Obligations 

Your CPA will be able to determine how much should be paid each quarter in estimated taxes to keep you from over or underpaying. Otherwise, you can opt to have taxes withheld from your income. Many pension plans, retirement accounts, and Social Security will withhold taxes upon request. A CPA can also help you find ways to lower your taxable income and minimize your tax obligations. This may include making charitable donations or reducing your taxable retirement withdrawals. 

If you need help maximizing your retirement income, turn to Linda M. Shiraiwa, CPA PS Inc. As a trusted CPA with years of experience serving the residents of Gig Harbor, WA, she can assist you in implementing the most effective tax planning strategies for your situation. She will ensure your tax withholding is set appropriately or you’re paying the right amount of estimated taxes so you still have enough cash flow to enjoy retirement. Call (253) 858-6030 to schedule a meeting, or visit her website to learn more about the tax preparation services she offers.