Oct

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Retirees, Check Your Withholding

It may need to be adjusted due to the 2017 federal tax reforms.

The Internal Revenue Service has a message for you. You may need to adjust the amount withheld from your paycheck or the size of your estimated tax payments because the agency is using new withholding tables this year. Should you underpay your taxes for 2018, you could be hit with a tax penalty in 2019.1

If you are retired or about to retire, you should take note of this announcement. While it may seem aimed at salaried employees and small business owners, the changes to the withholding tables also impact you.

Many retirees work in the gig economy. They walk dogs, drive for ridesharing companies, serve as home health aides, and act as management, marketing, legal, and health care consultants. The common thread here is self-employment. Self-employment means making estimated tax payments. This is a new experience for some baby boomers.2

If you have started freelancing or started a part-time business, you must join their ranks. You must file like a business owner even if you have an informal business venture that has lost money; if there is a profit motive, the I.R.S. considers that self-employment.2,3

Double-check your withholding even if you do not work part time. Paying estimated taxes is normal after you retire, whether you work or not; an employer no longer files a Form W-4 for you. Your retirement income probably comes from multiple sources and includes Social Security benefits, mandatory annual retirement account withdrawals, and maybe pension income from a past employer or a pension-like income arranged through a private contract.4

Part of your Social Security income can be subject to federal income taxes if your “combined income” exceeds a certain level. “Combined income” = adjusted gross income + non-taxable interest + 50% of your Social Security benefits. If you are single and your combined income falls between $25,000-$34,000, you may see up to 50% of your benefits taxed; the limit is 85% when your combined income tops $34,000. If you and your spouse file jointly and have a combined income between $32,000-$44,000, as much as 50% of your benefits may be taxable; above $44,000, the ceiling is 85%. Some states also tax Social Security benefits.4,5

Given all this, Form W-4V may be handy. You can file it to withhold a flat percentage from each Social Security payment: 7%, 10%, 12%, or even 22%.4,5

Do you receive a pension or pension-style income? Then you may want to file Form W-4P, which withholds taxes from those payments (you can indicate the number of allowances you wish to claim; the more you claim, the less money you withhold).4

Regarding the Required Minimum Distributions (RMDs) you must take annually from traditional IRAs and other qualified retirement accounts after age 70½, you have an interesting option if you are wealthy enough not to need 100% of the money. You can tell the custodian of your IRA (or other retirement account) that you want taxes withheld from the RMD, effectively taking care of the quarterly estimated tax payments you would otherwise make on the RMD amount.4

To help with all this, the I.R.S. offers an online withholding calculator. This is a feature of its Paycheck Checkup campaign. You can find it at irs.gov/individuals/irs-withholding-calculator.1

Be sure to consult a tax professional about your withholding. Fine print may need to be studied. For example, not all income is subject to withholding; some forms of self-employment income, income derived from rental activities, and income from jobs in the sharing economy may be exempt. Have this conversation before 2019 arrives.1

 

Citations.
1 – irs.gov/newsroom/avoid-penalty-for-underpayment-of-taxes-irs-says-check-withholding-make-estimated-payments [9/6/18]
2 – irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center [12/14/17]
3 – irs.gov/businesses/small-businesses-self-employed/business-activities [4/23/18]
4 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]
5 – kiplinger.com/article/retirement/T051-C000-S004-retiree-tax-tip-tally-taxes-on-social-security.html [9/5/18]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as a Wealth Advisor, The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment and retirement planning for individuals and 401k consulting for small businesses. Cities served include but not limited to are: Park City, Salt Lake City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, and American Fork City in Utah.

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Mark K. Lund is the firm's founder, CEO and author of The Effective Investor, a #1 Best Seller. He has written articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be successful. Get a free copy when you schedule your initial consultation.

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