September 9, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for September 9, 2024

Retirement Tax Withholding – Tips for Avoiding Tax Surprises

Radon and Murs discuss the importance of understanding tax withholdings in retirement to avoid tax surprises.  To help navigate this complex terrain, they bring in Taylor Wolverton, a Certified Financial Planner and Enrolled Agent specializing in tax strategy.

 

Retirement Tax Withholding – Tips for Avoiding Tax Surprises

Navigating the complexities of tax withholding in retirement can feel like venturing into uncharted territory. During your working years, taxes are often a distant concern. Employers handle withholding from each paycheck, ensuring that the process remains smooth and largely invisible to the employee. However, retirement changes this dynamic entirely…

Retirement Tax Withholding – Tips for Avoiding Tax Surprises

Navigating the complexities of tax withholding in retirement can feel like venturing into uncharted territory. During your working years, taxes are often a distant concern. Employers handle withholding from each paycheck, ensuring that the process remains smooth and largely invisible to the employee. However, retirement changes this dynamic entirely. Suddenly, there are no regular paychecks with taxes already deducted, and you must actively manage your tax withholding to avoid any unpleasant surprises come tax time.

Imagine expecting a comfortable, worry-free retirement only to find yourself facing a hefty tax bill or a confusing tax scenario that catches you off guard. Such surprises can disrupt your financial peace and leave you scrambling for solutions. The key to avoiding this predicament lies in understanding and proactively managing your tax withholding in retirement. In this blog, we’ll explore various tips and strategies to help you steer clear of tax surprises, ensuring that your retirement is as financially secure and stress-free as you envisioned.

Understanding Retirement Tax Withholding

For many, transitioning from a regular paycheck to retirement income requires a fundamental shift in thinking about taxes. During your career, tax withholding from your salary is automatic, making tax planning seem effortless. However, when you retire, various income sources, such as Social Security, pensions, annuities, and investments, must be managed for tax purposes. Understanding retirement tax withholding is crucial to avoid either overpaying taxes throughout the year or facing a substantial tax bill when filing your return.

The Role of a Financial Planner

To navigate this complexity, financial advisors like Taylor Wolverton, a CERTIFIED FINANCIAL PLANNER™  and an Enrolled Agent (EA) specializing in tax strategy, recommend conducting regular reviews of your tax withholding status. By understanding your different income sources and their tax implications, you can better estimate your annual tax liability and adjust your withholding accordingly. This proactive approach helps ensure you’re neither overpaying nor underpaying, giving you peace of mind.

Common Income Sources in Retirement and Their Tax Implications

Retirement income often comes from various sources, each with unique tax treatment:

  1. Social Security Benefits: Up to 85% of Social Security benefits may be taxable, depending on your overall income level. It is essential to decide whether to have taxes withheld from these payments or to pay estimated taxes quarterly.
  2. Pensions and Annuities: These are typically taxable as ordinary income. If you have a pension or annuity, you should consider setting up automatic tax withholding to avoid a large bill at tax time.
  3. IRA and 401(k) Withdrawals: Withdrawals from traditional IRAs and 401(k) plans are subject to ordinary income tax. You can elect to have taxes withheld from these distributions to avoid owing a large sum when filing your return.
  4. Investment Income: Interest, dividends, and capital gains are also taxed, often at different rates. Understanding the tax treatment of your investments is key to managing your overall tax liability.

The Importance of Tax Strategy Meetings

A regular tax strategy meeting can help retirees better understand their current tax situation and anticipate future changes. In these meetings, financial planners like Taylor Wolverton review income sources, evaluate tax brackets, and adjust withholdings to align with financial goals. For example, Taylor conducted over 85 tax strategy meetings last year, helping clients optimize their withholding strategies to avoid surprises.

Case Study: John and Jane’s Social Security Withholding Strategy

Consider the case of John and Jane, who retired a few years ago and have been living primarily on savings. This year, they decided to start their Social Security benefits, prompting a reassessment of their tax situation. Their combined Social Security income amounts to $55,000, with 63% taxable due to their other income sources.

To avoid a significant tax bill, Taylor recommended setting withholding rates of 12% for John and 7% for Jane on their Social Security benefits. This strategy ensures that they withhold sufficient tax throughout the year, resulting in a manageable tax liability when they file their return.

How to Adjust Your Tax Withholding

Adjusting your tax withholding is a critical component of effective retirement tax planning. Here are some steps to consider:

  1. Evaluate Your Income Sources: Review all potential income sources, including Social Security, pensions, investments, and required minimum distributions (RMDs) from retirement accounts.
  2. Estimate Your Taxable Income: Calculate your expected taxable income for the year. Be sure to consider both ordinary income and capital gains, as well as any deductions or credits you may be eligible for.
  3. Use the IRS Tax Withholding Estimator: The IRS provides an online tool to help taxpayers estimate their tax liability and adjust withholding accordingly. This can be particularly useful for retirees with multiple income sources.
  4. Adjust Withholding on Social Security Benefits: Social Security allows you to withhold at rates of 7%, 10%, 12%, or 22%. Choose a rate that aligns with your estimated tax liability to avoid surprises.
  5. Consider Quarterly Estimated Taxes: If you have significant investment income or other sources of taxable income that do not withhold taxes, you may need to make quarterly estimated tax payments to avoid penalties.

Why are Regular Reviews Essential?

Income needs and sources can change annually, especially in retirement. Regular reviews ensure that your tax withholding remains appropriate for your current situation. For instance, if you sell a major asset, like real estate or stocks, you may face a large capital gain that changes your tax bracket. Similarly, changes in Social Security benefits or required minimum distributions (RMDs) can alter your taxable income.

Case Study: Bob and Sue Adjust Their Withholding

Bob and Sue, both aged 71, have a different scenario. With Bob’s first full year of retirement, they need to adjust their withholding to reflect their lower taxable income. They prefer receiving a small refund, around $2,000, rather than a large one. Taylor recommended reducing their Social Security withholding from 22% to 12% for Bob and 7% for Sue, aligning with their lower income bracket.

By making these adjustments, Bob and Sue managed to reduce their tax withholding while still securing a small refund, thereby improving their cash flow throughout the year.

Tax Withholding Tips for a Smooth Retirement

Here are some additional tax withholding tips to help you avoid surprises in retirement:

  • Stay Informed: Keep up with any changes to tax laws that may affect your retirement income.
  • Review Regularly: Conduct annual reviews of your tax situation to adjust withholding as needed.
  • Consider a Professional: Engage with a financial planner or tax professional who understands retirement tax strategy to help guide your decisions.
  • Plan for Large Expenses: If you anticipate large medical expenses or charitable contributions, these can impact your tax liability and withholding needs.

Conclusion

Understanding and managing your tax withholding in retirement is essential to maintaining financial stability and avoiding unwanted surprises. By proactively adjusting your withholding and engaging in regular tax strategy meetings, you can ensure a smooth transition into retirement and enjoy peace of mind.

If you want to understand all this a little better, we offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.

Schedule your complimentary call with us to learn more about Retirement Tax Withholding – Tips for Avoiding Tax Surprises.

 

March 25, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 25, 2024

Navigating Tax Withholding – A Guide for Retirees

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss navigating tax withholding for retirees. When you retire, you have various sources of income, and you can choose to either withhold the tax on them, make estimated tax payments throughout the year, or do a combination of both.

 

Navigating Tax Withholding – A Guide for Retirees

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

Navigating Tax Withholding – A Guide for Retirees

Taylor Wolverton joined us on our podcast this week, and for those who don’t know, she’s our go-to person for everything taxes. This week we’re discussing tax withholding, which can change considerably when you retire.

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

What is Withholding vs Estimated Tax Payment?

There are two main ways to pay taxes (you can do a combination of both) which include:

  1. Withholding from income sources
  2. Making estimated tax payments

For our first method, taxes can be withheld from pensions, social security, IRA distributions, etc. Once you have your withholdings set up properly, this option requires the least amount of effort to maintain.

Estimated tax payments are another option and are due quarterly. At the time your tax return is filed, it’s common for your CPA / tax preparer to help you estimate how much you’ll need to pay every quarter with vouchers listing the amount to pay and when you need to pay it. You can go to IRS.gov and your state government website to make your quarterly payments.

The payment due dates are not even quarters and are:

  1. April 15th (for tax due on income received January 1 – March 31)
  2. June 15th (for tax due on income received April 1 – May 31)
  3. September 15th (for tax due on income received June 1 – August 31)
  4. January 15th (for tax due on income received September 1 – December 31)

The IRS requires taxpayers to ‘pay as you go.’ For example, if you sell highly appreciated stock before the end of March, the IRS requires that you make an estimated tax payment for the tax due on that sale of stock by April 15th of the same year. If you sold the stock during the month of November, your estimated tax payment would be due by January 15th of the following year. The potential consequence of not making estimated tax payments on time is underpayment penalties from the IRS which will be determined and reported on your tax return once it has been filed.

What You Need to Think About: Social Security

Social Security is something we review with our clients annually. You might receive your benefits immediately and your spouse years from now, so there may be a transition period for some families to consider.

The default withholding amount on Social Security is 0%. If you don’t make an election to have federal taxes withheld from social security, you may need to pay quarterly taxes on the income. We have an entire episode on taxation of social security benefits (listen to the podcast or read the blog post) if you’re interested.

Most benefits will be taxable on the federal level, but each state varies on whether they will tax social security benefits or not. The state of North Carolina does not tax social security.

If you want to withhold taxes from your Social Security, you can Google “form W-4V” or go to the IRS site (here). It’s an easy form to fill out and will allow you to start withholding taxes, with options for:

  • 7%
  • 10%
  • 12%
  • 22%

Once you fill out the form and submit it to the social security administration office, taxes will automatically be withheld. If you want to stop withholding taxes, you’ll fill out the same form again but ask for the withholding to stop.

It is not possible to withhold state tax on social security.

What You Need to Think About: Pension Income

Not everyone will have a pension, but if you do and want to begin withholding taxes from your pension, you’ll need to fill out Form W-4P. You’ll often receive the form from where your pension is coming from, such as the government or a union, but you can also find it publicly available online.

Unfortunately, the form is not as straightforward as the social security withholding form, and it’s more of a guide to approximate withholding taxes.

We recommend using the IRS Tax Withholding Estimator, which will help you fill out the form.

What You Need to Think About: IRA Distributions

An IRA is an interesting form of income because you contribute to your IRA for so long, and then in retirement, may begin withdrawals to cover expenses, and/or be forced to withdraw through required minimum distributions (RMD).

Clients turning 73 begin RMDs for the first time and will owe federal and state tax on those distributions. The amount of the RMD, the associated tax liability, and appropriate rate for withholding is a conversation we often have with clients.

If you’re starting recurring monthly distributions from an annuity, the most common default federal tax withholding is 10%. You can fill out Form W-4R to withhold an amount other than 10% or not withhold taxes at all.

What You Need to Think About: Income Not Eligible for Withholding

Some forms of income are not eligible for withholding. Some of these sources of income include interest (from a money market account, CD, checking account, and/or savings accounts) dividends, capital gains, sale of property, rental income, self-employment income, royalties, alimony, etc.

For a one-off income event such as the sale of property or sale of highly appreciated stock, you may consider making a one-time estimated tax payment.

However, if you have income not subject to withholding that recurs more regularly such as self-employment or rental income, you want to consider paying quarterly taxes before each due date during the year.

To review your situation in-depth and determine whether any adjustments to withholdings are needed, you will need to review all sources of income, determine the annual dollar amounts expected to be received, and review all current tax withholdings.

Every client’s goal is different. You may want a refund every year, or you might prefer to make a payment at the time your tax return is filed.

Your financial professional can help you set this up properly to align with your goals.

If you’re unsure about taxes in retirement, just reached retirement, or want to adjust your withholdings so that you’re not hit with a surprise tax bill, feel free to give us a call and we’ll be more than happy to help you through this process.

Schedule a call to speak with Taylor Wolverton.

June 20, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 20, 2023

This Week’s Podcast – Mid-Year Tax Planning – Why So Important in Retirement?

It’s important to look at the previous year’s tax situation because some things, like Roth conversions and qualified charitable distributions, need to be done before the end of the year in order to be reported on your tax returns.

Listen in to learn the importance of coming up with a good tax withholding strategy to avoid tax liabilities and bills during tax season. You will also learn about the tax benefits of donor-advised funds and qualified charitable distributions.

 

This Week’s Blog – Mid-Year Tax Planning – Why So Important?

Why are we talking about tax planning in the middle of the year? Mid-year tax planning allows you to get everything in order before the end of the year to lower your tax obligation as much as possible.

In June of 2023, we’re doing a lot of work to get ready for our tax planning and strategy meetings we’ll be having later this year. A lot of prep work goes into these meetings because it’s one of the most intense that we’ll have all year.

Mid-Year Tax Planning – Why is it So Important?

Why are we talking about tax planning in the middle of the year? Mid-year tax planning allows you to get everything in order before the end of the year to lower your tax obligation as much as possible.

Note: We are not giving specific advice. We’re talking in general terms and advise you to discuss your own tax planning with a professional who can recommend the best method to reduce your tax burden.

In our most recent podcast (listen to it here), we have two members of our team with us, Nick Hymanson, CFP® and Taylor Wolverton

In June of 2023, we’re doing a lot of work to get ready for our tax planning and strategy meetings we’ll be having later this year. A lot of prep work goes into these meetings because it’s one of the most intense that we’ll have all year.

Why Do We Do Tax Planning and Tax Strategy Before the Beginning of the Year?

First, we want to review your tax situation from last year so we can understand potential moves we can make before the end of this year.

For example, Roth conversions or qualified charitable distributions (QCDs) need to be made before the end of the year to be reported on your tax return. Changes to your contributions or account conversions must be completed before December 31st of the year to be claimed on your taxes.

Mid-year tax planning helps us get everything in order to have a discussion with our clients on which strategies we can employ to lower your tax burden.

How Financial Planning Ties into Tax Planning

Financial, tax, and retirement planning are all linked together, or they should be if they’re done professionally. We have clients who first retire and live on cash in the bank, and then they start taking money from an IRA or a required minimum distribution.

In our process, at the beginning of the year, we have a financial planning meeting to update where their income is coming in this year, and we review what happened in 2022 (or the year prior).

From an income perspective, we want to understand where your income came from last year. We want to understand any unique changes that may have transpired this year and your income last year.

During the year, you may have income coming in from multiple sources, and it’s crucial that you have a good tax withholding strategy in place.

Proper tax withholding will allow you to avoid any unexpected tax surprises the following year. Having conversations throughout the year allows us to position our clients to pay less taxes by making smart financial decisions.

For example, if you want to sell a highly appreciated stock, we may recommend holding off until the beginning of the coming year because there are tax advantages.

We perform a full software analysis of our clients’ past year taxes to look for:

  • Filing status
  • Social Security number accuracy
  • Sources of income (interest, dividends, etc)
  • Withholdings 

We look through all these figures with our clients to help you better understand the tax obligations of each form of income. If you want to adjust your withholdings or make income changes, we’ll walk you through this process.

For example, you may not want a refund at the end of the year and want to withhold just enough taxes to be tax-neutral. You won’t pay or receive anything at the end of the year from the IRS.

With a mid-year tax plan, we have a better understanding of the steps that must be taken to reach your goals in the coming year.

Things to Do Before December 31st

Retirees must do a few things before the end of the year by law. Here’s what you need to know:

Donor-advised Funds

Sometimes we learn from a tax return or through a conversation with our clients that they give $10,000 to charity per year. Can you itemize? Sure, but the standard deduction is so high that it often doesn’t make sense to do this.

What’s the Standard Deduction

For your reference, the standard deduction in 2023 is:

  • Single: $13,850
  • Married filing jointly: $27,700 (65+ goes up by $1,500 per spouse)

Itemization won’t make sense if you have less than the standard deduction amount in contributions.

If you do a donor-advised fund, you can stack charitable contributions and use the multi-year contributions as a deduction this year.

Let’s assume that you put $40,000 into a donor-advised fund. You can still make $10,000 contributions to your favorite charity, but you can then take a $40,000 deduction this year to negate your tax burden. Itemizing is the best course of action if you have more deductions than the current standard deduction amount.

We may recommend this strategy if you expect a very high tax burden and want to lower your tax obligation.

Opening a Donor-advised Fund

We use Charles Schwab for our funds, but you can use a custodian of your choosing. A donor-advised fund looks just like any other account held at Charles Schwab, except for a few differences. Checks are written directly to a Schwab charitable account and funds are held directly in this charitable account. You can assign contributions to charities of your choice.

Funds remain in the account and can be withdrawn and moved to the charities in the future. Once you put money into the fund, you cannot reclaim it in the future. You can decide annually on who you want to distribute contributions to.

However, it is very important that Charles Schwab has information on the charity that you want to disperse the money to and that everything is in order for the distribution to be made problem-free.

Qualified Charitable Distribution

Qualified charitable distributions (QCDs) are another tactic that you can use if you’re over the age of 70-and-a-half. Age requirements and the time of your distribution are crucial and one of the reasons that people often work with a financial planner.

We can make sure that you’re making the QCD properly and get all the tax benefits that go along with it.

Note. If you have a required minimum distribution (RMD), you can set up the QCD to be taken directly from this. A key benefit is that if the RMD never hits your bank account, you don’t have to pay taxes on it.

Making Out Your QCD Check

In terms of Charles Schwab, we want to make sure that the QCD check is made out directly to the charity and not the account owner. If the check is written to the tax owner, it is considered taxable income.

We need a few things when writing out the QCD check:

  • Name of charity
  • Charity’s tax ID
  • Charity address
  • QCD amount

One important thing to note is that there’s an option to send the check directly to the charity or to the account owner, who can then hand-deliver the check to the charity.

The most important thing is to have the check written to the charity itself with the tax ID.

What You Need to Gather for a Tax Planning Strategy Meeting

Whether you work with us or someone else on a tax planning strategy meeting, you’ll need a few documents to get started:

  • Last year’s tax returns
  • Income for the coming year
  • Changes to income in this year
  • Change to cost of living on Social Security

We really need to know your sources of income and if any changes to this income have occurred in the last year. Cost of living adjustments are a big one and will impact your taxes, but all of this is information necessary for a tax planning strategy meeting.

IRMAA is another thing that we want to consider, and we have a great guide on the topic, which you can read here: IRMAA Medicare Surcharges.

Medicare looks back two years to determine your surcharges, which is something we can plan for with enough time and a strategy in place. We want to manage your Medicare surcharges so that you don’t need to pay more than necessary for your Medicare.

Tax strategy can help you better prepare for your taxes and make strategic moves that will save you a lot of money in the future.

We have a team of people working with us to handle all these moving parts and walk our clients through the process.

Want to learn more about retirement planning?

Click here to view our latest book titled: Secure Your Retirement.