Calculating Withholding On Retirement Income.

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ghostdog1108
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Calculating Withholding On Retirement Income.

Post by ghostdog1108 » Sat Oct 05, 2013 11:15 am

I will be retiring in the near future and would appreciate any tips on properly calculating our tax withholding levels.
A few givens;

* Wi residents, married couple, filing jointly, standard deduction, State does not tax SS benefits. age at retirement (me) 65 (spouse) 63


Income in retirement:
SS- $27,600 (mine) + $13,800 (spouse)= $40,800/YR
401K- (mine) $40,000/YR
Interest-( $1200/YR)

Thoughts on how to properly calculate when I start a full retirement year would be appreciated.

Retread
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Location: Southwest Florida

Re: Calculating Withholding On Retirement Income.

Post by Retread » Sat Oct 05, 2013 1:46 pm

Simply calculate your estimated state and federal tax and have that withheld or pay quarterly installments.
Bruce
absit iniuria verbis

livesoft
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Re: Calculating Withholding On Retirement Income.

Post by livesoft » Sat Oct 05, 2013 2:11 pm

Just run a "what if" tax return like you always do in December. Just put in your income estimates, etc. wherever they come from. That's what I've been doing for many years and will continue to do so until I die.
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ghostdog1108
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Re: Calculating Withholding On Retirement Income.

Post by ghostdog1108 » Sat Oct 05, 2013 3:10 pm

livesoft wrote:Just run a "what if" tax return like you always do in December. Just put in your income estimates, etc. wherever they come from. That's what I've been doing for many years and will continue to do so until I die.


I guess it is pretty simple. Thanks.

MathWizard
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Re: Calculating Withholding On Retirement Income.

Post by MathWizard » Sat Oct 05, 2013 3:38 pm

Calculating your taxes would be the most exact.

If you want something easy for federal taxes, try
http://apps.opm.gov/tax_calc/withhold_calc/index.cfm

For $82K this gioves a monthly income of 6333, I used this with
3 witholding allowances (2 for you at 65 and one for your wife) and
the calculator returns a $700.55/month withholding for federal taxes
which works out to be 11%.
That sounds about right to me with very little effort.
Some of your SS is not taxable (somewhere in the 15% to 50% not taxed, so
this estimate may be high.)

Assuming you & wife are earning at least $82K , you could just work out the percentages
of your current income taxes pre-retirement, and use that same percentage on
your first partial and full year of retirement. Due to the progressive nature of income taxes,
this should over-estimate. In your second year of full retirment and subsequent years, just use
the percentage from last year's taxes, that might slightly underestimate, but not so bad as to
generate a penalty, barring a large windfall, large 401K withdrawal, or a huge change in tax law.
This is what I plan to do, to keep it simple.


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OAG
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Re: Calculating Withholding On Retirement Income.

Post by OAG » Sat Oct 05, 2013 4:43 pm

Prudent not to have a refund due but this is just my opinion (so we never over pay taxes but stay within the "safe haven" to eliminate any penalties.

The numbers you provided indicate:

Federal
SS - 15% in non-taxable so not all of your SS is taxed at the federal level
Remainder less Deductions (Itemized (Schedule A) or Standard)
Remainder less Personal Exemption (be sure to use over 65 years old if applicable)
Remainder should be taxable income (from you numbers it looks like you are in 10% for some and 15% for all over the 10% level).
Take the total remainder - less the 10% amount and multiply by 15% then add the 10% tax on the 10% money (I am too lazy to look it up).
You may just be able to satisfy the withholding by having it withheld from SS (thereby negating the need to file Estimated Vouchers for 25% of the tax each quarter) and/or having it withheld from the 401K withdrawals or a combination of the two.

State
Is about the same process except since SS is not taxed (you said) subtract that from the gross state taxable amount then taking that remainder.
You would also subtract any appropriate deductions personal exemptions and/or state credits.

Note: there are amounts of taxes due that would negate the need to even pay State Taxes until the end of the year with the tax return. For example in OH unless the state taxes due are over $500 or more no Estimated Vouchers are due. We have approximate the same situation dollar-wise as you but OH does not tax SS or Military Retired Pay gives a Credit for IRA RMD's gives a over 65 credit a Joint Income credit and a little personal exemption. By the time that is all done we usually owe less that $200 in state of OH taxes so we just send the check with the return.

Excel (or one of the free Spreadsheets) is you friend or any of the free tax estimators.
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979.

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magellan
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Re: Calculating Withholding On Retirement Income.

Post by magellan » Sun Oct 06, 2013 7:49 am

Keep in mind that the hassle of computing estimated taxes is mostly limited to the first year after a big income change. There's another safe-harbor rule that says as long as you pay at least 100-110% (depending on income level) of your of your previous year's tax bill in 4 equal estimated tax payments, you won't owe a penalty regardless of how much you underpay.

If your tax bill bounces around a lot from year to year, this approach will have you constantly under or over paying. OTOH, I think for most early retirees it's a simple and workable approach.

Jim

(edited to include mention of 110% safe-harbor limit for higher incomes)
Last edited by magellan on Tue Oct 08, 2013 5:57 am, edited 1 time in total.

ghostdog1108
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Re: Calculating Withholding On Retirement Income.

Post by ghostdog1108 » Mon Oct 07, 2013 3:54 pm

Thanks everyone.

Retread
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Re: Calculating Withholding On Retirement Income.

Post by Retread » Mon Oct 07, 2013 7:27 pm

magellan wrote:Keep in mind that the hassle of computing estimated taxes is mostly limited to the first year after a big income change. There's another safe-harbor rule that says as long as you pay at least 1/4 of your previous year's tax bill for each of the 4 estimated tax payments, you won't owe a penalty regardless of how much you underpay.

If your tax bill bounces around a lot from year to year, this approach will have you constantly under or over paying. OTOH, I think for most early retirees it's a simple and workable approach.

Jim

Careful with this advice. 110% may be required.
Bruce
absit iniuria verbis

curmudgeon
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Re: Calculating Withholding On Retirement Income.

Post by curmudgeon » Tue Oct 08, 2013 2:04 pm

You might find it interesting to see if you could benefit by bunching (all or in part) some of your 401K withdrawals into alternate years (before you hit RMDs at age 70). That is, something like take 60K out one year, and 20K the next. It might not make a difference, but you might be able to avoid some taxation on SS benefits.

I know it wasn't the question you asked, but you might also consider delaying SS for one or both of you and drawing more from 401K for several years, to get a higher SS benefit overall. There are lots of threads on this, and also on various other non-obvious SS options.

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