Preparation Time for Retirees Gaining Income from Investments
For retirees, managing estimated tax payments is an essential aspect of financial planning. Here's a breakdown of the key points to consider:
Calculating Estimated Tax Payments
Taxpayers have two main methods for calculating their quarterly estimated tax payments on income. The first is the Safe Harbor Method, which allows retirees to pay four equal payments throughout the year, with 100% of their total tax liability from the previous year as the target. If their prior-year Adjusted Gross Income (AGI) was over $150,000, they should aim for 110%.
Alternatively, retirees can use the Annualized Income Method, which is beneficial for those with uneven income distribution throughout the year.
The Safe Harbor Method
Under the Safe Harbor Method, retirees who can't pay their full estimated tax payment may utilize strategies to minimize tax penalties. These include paying as much as they can, setting up an IRS payment plan, increasing tax withholding on their IRA or pension payments, and keeping an eye on state tax withholding.
Deadlines and Penalties
The deadline for the third-quarter estimated tax payment is September 15th, covering income received between June 1st and August 31st. Failure to pay by this deadline could result in an underpayment penalty of 7% interest, compounded daily, until the full payment is made.
However, if you're a taxpayer living in a designated disaster area, you may have an extended IRS deadline for some 2025 estimated tax payments.
Unwithheld Income Sources
It's important to note that tax withholding is not available for income sources like capital gains, dividends, interest, and gains from selling cryptocurrency. Retirees, not having an employer to automatically withhold taxes on their behalf, face a particular risk of incurring an IRS underpayment penalty.
Online Payment Methods
Retirees can calculate their estimated tax payments using Form 1040-ES and can choose from several payment options, including debit, credit card, digital wallet services, or the IRS Direct Pay online tool. Using online payment methods may speed up the processing time of your payment and avoid potential processing fees.
Exemptions and Waivers
Taxpayers who are recently retired and older than 62 (or disabled) may request an estimated tax penalty waiver from the IRS by filing Form 2210 and showing a "reasonable cause" for the underpayment.
Consulting a Tax Professional
Given the complexity of estimated tax payments, consulting with a tax professional is recommended if a retiree is unsure whether they're required to file a quarterly tax return. The IRS requires retirees to pay federal income tax on a 'pay-as-you-go' basis through two methods: tax withholding on income payments and quarterly estimated tax payments.
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