Will Your Withholding be a Problem?Submitted by Bernhardt Wealth Management on November 19th, 2018
Many taxpayers have recently seen articles or other notices cautioning about the dangers of under-withholding. The idea is that you need to be very careful that your employer is holding out sufficient funds from each paycheck so that you don’t end up owing taxes next April 15. In fact, the Treasury Department has launched a major publicity effort around this message.
But why? The new tax law, which went into effect at the beginning of 2018, has generally resulted in slightly lower tax liability for most Americans. It stands to reason that there would be less chance of under-withholding, rather than more, for most taxpayers.
Not that it’s a bad idea to give careful consideration to your potential tax liability with respect to current income. Most taxpayers should review their overall income and taxation situation at least annually, and this is especially important for those in retirement who are taking required minimum distributions (RMDs) from IRAs, 401(k) plans, 403(b) plans, or other qualified retirement accounts. For these individuals, it’s usually important to coordinate RMDs with Social Security and pension income, if any, in order to maintain both the needed income level and tax efficiency.
Speaking of Social Security, if you are receiving payments and your adjustable gross income (AGI) combined with nontaxable interest and half of your Social Security benefits equal $34,000 for single filers or $44,000 for those married and filing jointly, you are required to pay taxes on 85 percent of your Social Security income. You can file Form W-4V to have the government withhold a flat rate from each Social Security check; this usually results in a slight overpayment and subsequent refund. Those paying quarterly, however, rather than having taxes withheld from Social Security, may need to do some careful estimating to make sure they are paying enough to avoid owing additional taxes when they file their returns.
Most people 70 ½ years old or more should pay quarterly estimated taxes on their RMDs. There is an option, however, to ask the plan custodian to withhold the entire year’s estimated taxes from the final payment. But it’s important to follow the proper procedure; you shouldn’t receive the payment yourself, then make the payment, because the IRS could assess penalties for missing the quarterly deadlines.
The bottom line is that most taxpayers shouldn’t be alarmed by the government’s PR campaign for more caution in withholding. For most people who are already paying attention to their annual tax liabilities and quarterly payments—if any—there shouldn’t be much change needed.