September 21, 2018 / 10:21 AM / a year ago

New U.S. tax law could create underpayment headaches for retirees

CHICAGO (Reuters) - The U.S. Internal Revenue Service hoisted a big red-flag warning to retirees earlier this month: take a look at how much income tax you are paying throughout 2018, because the amount could need an adjustment in the wake of the new federal tax law.

FILE PHOTO: A sheet of United States one dollar bills is seen on a light table during production at the Bureau of Engraving and Printing in Washington November 14, 2014. REUTERS/Gary Cameron/File Photo

The Tax Cuts and Jobs Act of 2017 (TCJA), signed into law by President Donald Trump last December, made important changes to tax rates, brackets, deductions and exemptions that affect all taxpayers. Retirees need to pay special attention to income coming from tax-deferred retirement accounts, pensions and annuities. Higher-income retirees may also owe taxes on Social Security benefits.

The amount of total income tax you owe could be going up or down, depending on your personal circumstances.

Failing to pay the right amount through the year could subject you to a penalty next April when your federal income tax return is filed. The penalty is determined by multiplying an interest rate, determined by the IRS, by your underpaid amount; the current interest rate is 5 percent. Taxation of retirement income by states is all over the map (, but your state tax return also could be impacted.

The IRS issued a bulletin earlier this month urging retirees to do a check-up on amounts that are being paid in quarterly installments or withheld ( Taxes are due throughout the year, either through quarterly estimated payments, or through withholding by pension plan sponsors or annuity providers. Taxes also are owed on Social Security.

The TCJA marks the first major revision of the tax code since 1986. It reduced tax rates and expanded income tax brackets. The standard deduction nearly doubled from $12,700 to $24,000 for married couples filing jointly, and from $6,350 to $12,000 for single filers. But the standard deduction actually is higher for most retirees, because taxpayers older than 65 can deduct an additional $1,300. In addition, the TCJA caps deductions for state and local income and property taxes at $10,000 for both married couples and single individuals, and personal exemptions were eliminated.

You may need to increase or reduce the amount of tax being paid during the year - and there is still time to make an adjustment before the year ends. “There are enough moving parts here that the only way to get the right answer is to run a projection,” said Greg Rosica, partner in EY’s private client services practice in New York City.


One way to avoid a penalty, Rosica notes, is to base your payments on the prior-year taxes and pay “at least 100 or 110 percent of that amount.” Another way is to project the amount you owe for the current year and pay at least 90 percent in four quarterly installments. (The final quarterly payment for 2018 is due on Jan. 15, 2019.)

The third method is annualized income installment. This is used by taxpayers who receive uneven levels of income throughout the year; this approach smoothes the amount owed quarterly using a reasonable estimate of your income for the year. For more on this, see Chapter Two of IRS Publication 505. ( For retirees who receive a monthly pension or annuity check, this may mean changing the amount of federal income tax they have withheld.

If you are underpaying on income that requires quarterly payments, send in the unpaid amount as soon as possible to stop underpayment penalties from accruing. If additional payments are due on income that is withheld, contact your former employer to make a change. The IRS cautions that due to the limited amount of time remaining this year, you might need to cover this type of expected tax liability through an additional direct tax payment, as you would a quarterly payment.

Higher-income retirees also pay taxes on Social Security benefits. The TCJA does not change the formulas for taxation of benefits, but Social Security income does figure in to your total income tax liability as determined by the federal tax rates.

Social Security beneficiaries receive a form from the IRS during tax season (Form SSA-1099) that reports net benefit subject to tax after Part B Medicare premiums have been subtracted. No taxes are paid by beneficiaries with combined income equal to or below $25,000 for single filers and $32,000 for married filers; above those levels, tax is determined according to two income tiers. (

The IRS notes it is possible to ask the Social Security Administration to withhold tax on benefits at one of four flat rates as part of an overall withholding plan; you can initiate withholding by filing IRS Form W-4v.

Unsure of whether your withholding or quarterly payments should be adjusted? Rosica advises consulting an accountant, or using an online tool to analyze your situation. The IRS website offers a withholding calculator that offers a good start ( You will want to have last year’s tax return handy, and records of how much you have withheld or paid so far this year.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Reporting and writing by Mark Miller in Chicago Editing by Matthew Lewis

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