By Dana Anspach via Iris.xyz
Many upcoming retirees aren’t quite sure how taxes in retirement are calculated. It’s not all that different than the way they are calculated while you are working. Much like when you are working, you need to have an estimate of the amount of taxes you are required to pay so you know what amount to have withheld from pensions, Social Security, or other types of income. In this article we’ll look at a series of sample calculations so you can see how to calculate your tax withholding in retirement. We look at scenarios using both 2017 and the new 2018 tax rates and rules.
The Goal – Withhold Just the Right Amount
The goal is to withhold enough taxes that you will be about break even (you won’t owe the government, but you won’t get a giant refund either).
Some people like to ‘over-withhold’ taxes, meaning they pay in more taxes than will be owed, and when they file in April they get a refund. This isn’t ideal because you are lending your money to the IRS all year. The IRS does not give you any interest on the money that you are lending them. (However, with current interest rates so low you may not be getting much interest from your bank either.)
On the other hand, if you do not have enough money withheld throughout the year (or do not pay the IRS enough in estimated payments) it is likely that you will be ‘under-withheld’ and when you file you will owe the IRS. When this happens the IRS can charge you an under-withholding penalty tax. Yikes!
Click here to read the full story on Iris.xyz.