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Avoid a Surprise Bill at Tax Time  

IRS urges retirees to check withholding on pension and annuity payments 

IRS forms on table with calculator

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The IRS is urging retirees to check their withholding for 2018 — or risk a surprise bill come tax time.

Retirees receiving a monthly pension or annuity check could be affected by what the IRS is calling major changes as a result of last year's Tax Cuts and Jobs Act, which included revised tax rates and income brackets, an increase in the standard deduction and the removal of personal exemptions. 

How tax reform affects you depends on your individual financial situation, says IRS spokesman Eric Smith. “One thing that may help a lot of seniors is that the standard deduction has gotten a big bump,” he says. (Standard deductions have nearly doubled; they are now $24,000 for married couples filing jointly, $18,000 for heads of household and $12,000 for individual taxpayers.) “On the other hand, you don’t have personal exemptions anymore.”

To help retirees determine whether the tax they will owe has gone up or down, the IRS is urging use of its Withholding Calculator to double-check income, deductions and tax credits for 2018.

“If you have a pension, treat the pension as if it’s a job,” Smith says. Use the calculator to enter payment amount, frequency of the payment and the amount of tax withheld so far this year. The tool will use this information to recommend the number of allowances you should be claiming.  


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If that number is different from what you’re claiming now, you can use Form W-4P to make a withholding change. For those who find they have been under-withholding, there are several options available to make up the difference. 

In many cases, claiming zero allowances (which increases tax withholding) will cover your expected tax bill. If not, you can ask your plan administrator to withhold an additional sum from each payment. 

Another option for those who get Social Security in addition to a pension or annuity is to voluntarily withhold tax on your Social Security benefits. 

Regardless of how you choose to pay your bill, changes to the law mean that double-checking is key — especially as the year end nears. “Later in the year, there’s less time to cover what you need to cover,” Smith says. “You need to take that into account.” 

The new IRS recommendation for retirees is part of the agency's wider Paycheck Checkup campaign aimed at making all taxpayers aware of the need to review their withholding. The Withholding Calculator was introduced this year to help people figure out their tax liabilities under the new law. 

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