The IRS has a new warning for retirees, and while it’s not about a scam it could end up costing older taxpayers more money than they expect to pay.
The agency issued a statement urging Americans to check the amount being withheld from retirement accounts and monthly pension or annuity checks, as soon as possible, in order to avoid a penalty next year.
Since the year is almost over, the IRS said those who discover they have been paying too little, might need to make a quarterly estimated or additional tax payment directly to the agency.
The Tax Cuts and Jobs Act, which enacted a slew of changes to the U.S. tax code, altered the way dues are calculated by the IRS. As such, some retirees are at risk of having too little withheld from regular payments.
Overall, more taxpayers than normal are at risk of having to pay the agency next April.
According to a simulation conducted by the Government Accountability Office (GAO) in August, which reviewed the revised federal tax withholding tables for 2018 implemented by the IRS and the Treasury Department, 21 percent of workers are at risk of having their taxes underwithheld – 3 million more than projections based on the old tax code.
Only 6 percent of taxpayers are expected to have wages accurately withheld, while 73 percent are likely to have their taxes overwithheld. The former is three percentage points less than a simulation conducted using the same withholding structure and the old tax code. Accurate withholding was assumed to be within $100 of what is truly owed.
This year, employers are using W-4 forms already on file to calculate withholding amounts, which has posed problems for taxpayers because the sweeping tax reform changes address everything from personal exemptions to the standard deduction. The Tax Cuts and Jobs Act gave the Treasury Department authority to determine the withholding allowance structure because the old method was no longer suitable, and there was not enough time to issue a new W-4.
When asked in February about how many errors the Treasury has seen so far this year, Treasury Secretary Steven Mnuchin declined to comment directly, instead urging taxpayers to use the IRS withholding calculator.
Employees can update their withholding amounts and the administration has encouraged them to use the tax calculator, available on the IRS website. Retirees can also use the tool, entering their pension like income from a job. They can also consult a financial adviser.
For Social Security tax payments, the IRS says individuals can ask the Social Security Administration to withhold taxes at specified rates ranging from 7 percent to 22 percent. Changes can be made online.
Changes to IRA withholding amounts can also typically be made online.
The Trump administration released a proposal for the new 1040 tax document, or the U.S. individual income tax return, in June. It is expected to release a new W-4 form later this year.