Tax liabilities with pension.

[GeorgeLape]

I started taking my pension from a company that I used to work for. And I am worried about the taxes that I will be responsible for in April. I am not sure how it will affect my yearly income. Is it taxed at a different rate than our salaries, will it be taxed more when added to income. How will this work.
Let me start with a little background. My wife and I make around $210,000 a year. We both claim married 2 for taxes. We both have about 5% taken out for our 401k's. And we usually owe about $2500 at the end of the year. The pension is 2800 with about 300 taken out in taxes.
We presently have $35,000 in debt. And around $6200 in monthly bills. Between the mortgage and utilities our monthly bills are around $7600 that's with the bills and debt. I plan on using the pension money to pay pay off what I can and then a year from now bring my tax liabilities down to 0 married and my wife will do the same and then upping the 401k's. We then plan on investing the pension money. But my main concern this year is paying off the bills I have and the taxes that will be due at the end of the year. I am thinking of putting between $250 and $400 away monthly extra for the taxes.

Right now my finances are a mess and this extra money will straighten it out.


Thanks for the help.

[~bs]

generally subject to federal taxes, but state depends on what state you live in.

you could make quarterly withholdings on your estimated taxes or should be able to have taxes withheld on pension distributions if you contact the administrator.

[disneysteve]

This is definitely a question you need to ask your accountant, not an internet message board. There are too many variables for anyone here to give you a solid answer.

[snafu]

You need to work out accurate figures for Gross Income from various sources and understand the rates incurred from various income streams less tax currently deducted. If you do not make quarterly payments you can be charged a penalty and interest over and above the actual sum owed.

With a $ 19 T deficit, the government is seeking every dime to be squeezed from IRS.

[GeorgeLape]

You need to work out accurate figures for Gross Income from various sources and understand the rates incurred from various income streams less tax currently deducted. If you do not make quarterly payments you can be charged a penalty and interest over and above the actual sum owed.

With a $ 19 T deficit, the government is seeking every dime to be squeezed from IRS.

Why would I have to make quarterly payments. I get paid every week and taxes are taken out and the same for my wife's paychecks. The pension is paid at the end of the month and taxes are also taken out. I usually pay some thing at the end of the years, but it isn't a killer.
What I am curious about is how the pension will affect the rest of mine and my wife's pay. Does the pension get added to our salaries and then taxed (everything) at a higher bracket if it goes into one?
I will put money on the side to take care of what ever the extra tax may be.
And then next year I can make adjustments accordingly.
I have another 3 or 4 years to retirement so hopefully I can get everything in order to do that. My wife is a few years younger than I am and will continue to work after I retire. So our 401k's won't have to be touched for awhile.

[Drake3287]

You need a professional to give accurate advise but generally pension's are no different then your regular work earnings. The reason most people think you pay less taxes with retirement income is simply because most people have a lower tax liability at that age. In your case it doesn't sound like that's the situation.

Some states are don't tax certain retirement earnings so it depends on where you live.

[GeorgeLape]

You need a professional to give accurate advise but generally pension's are no different then your regular work earnings. The reason most people think you pay less taxes with retirement income is simply because most people have a lower tax liability at that age. In your case it doesn't sound like that's the situation.

Some states are don't tax certain retirement earnings so it depends on where you live.

But I am not asking about the tax liability of my pension. What I am asking is what happens to my taxes at the end of the year. How will that affect my income. Will it bring me into the next tax bracket. We make 210,000 together and then add the pension on top of that. How will that affect us. I don't want to be unprepared and have to pay 10k in taxes because of the pension. I would ask my tax guy but I can't get in touch with him.

[Thrif-t]

George I believe your pension income will be added to your ordinary income and it'll probably push you up to a higher bracket.

http://www.kiplinger.com/article/taxes/T055-C000-S002-how-6-types-of-retirement-income-are-taxed.html

[GeorgeLape]

I already found that page. Thanks. I had a feeling it would do that. Now I have to figure how much to put on the side for the taxes.

[tripods68]

The way you can reduce your taxable income is to save $$ on pre-tax retirement accounts. For 2017, you still have time to put more money away.

Maybe you can increase that to reach the full contribution amount 18K (2017) if you are under 50 years of age. If you are over 50 years old, IRS allows additional 6K in contributions. Your wife needs to do the same thing if she isn't maxing 401K.

[scfr]

What I am curious about is how the pension will affect the rest of mine and my wife's pay. Does the pension get added to our salaries and then taxed (everything) at a higher bracket if it goes into one?

I'm going to assume you are in the USA. If you wind up in a higher marginal tax bracket, no, your entire income does NOT end up in the higher bracket.

https://www.khanacademy.org/economics-finance-domain/core-finance/taxes-topic/taxes/v/tax-brackets-and-progressive-taxation

What has been alluded to, is you want to make sure you haven't underpaid your taxes by so much that you wind up owing not only taxes due but also a penalty. Are you on track to pay (through payroll and pension deductions) at least as much in federal income taxes in 2017 as your total tax bill was in 2016? If so, you should be OK as far as not incurring a penalty. But if you're not on track to wind up having paid at least as much in federal income tax in 2017 as you did in 2016, then you may want to pay quarterly estimated taxes to avoid a penalty. I'm NOT a tax professional but I pay quarterly taxes myself due to self-employment income.

I do recommend that you consult your tax professional as soon as possible to discuss your concerns.

[disneysteve]

I would ask my tax guy but I can't get in touch with him.

I don't think you should make any major decisions until you speak with him. It's only August so you have time to figure this out. And I'm guessing if you can't reach him because he's on vacation or something, you'll be able to get in touch with him soon.

[GeorgeLape]

The way you can reduce your taxable income is to save $$ on pre-tax retirement accounts. For 2017, you still have time to put more money away.

Maybe you can increase that to reach the full contribution amount 18K (2017) if you are under 50 years of age. If you are over 50 years old, IRS allows additional 6K in contributions. Your wife needs to do the same thing if she isn't maxing 401K.

We are in a catch 22 situation right now. We can't raise our 401k's past 5% until the bills are paid. Once that is done we will max them out. So for now I will take $500 a month from my pension and put that away towards any future IRS bill. Right now I am 59 and will retire in 4 years. My wife is 3 years younger and plkans to work until 65. I won't have to touch my 401k until I am 68.

[GeorgeLape]

I'm going to assume you are in the USA. If you wind up in a higher marginal tax bracket, no, your entire income does NOT end up in the higher bracket.


What has been alluded to, is you want to make sure you haven't underpaid your taxes by so much that you wind up owing not only taxes due but also a penalty. Are you on track to pay (through payroll and pension deductions) at least as much in federal income taxes in 2017 as your total tax bill was in 2016? If so, you should be OK as far as not incurring a penalty. But if you're not on track to wind up having paid at least as much in federal income tax in 2017 as you did in 2016, then you may want to pay quarterly estimated taxes to avoid a penalty. I'm NOT a tax professional but I pay quarterly taxes myself due to self-employment income.

I do recommend that you consult your tax professional as soon as possible to discuss your concerns.

We usually pay a little over $2500 a year. I will put some cash on the side if we end up owing more.

Thanks guys for the information.

[snafu]

George, I misread your initial post and inexplicably concluded your pension formed a major percentage of your family income. Can you extrapolate all anticipated income by December 31, 2017, less deductions to work out taxable income? It can't hurt to bump up your Emergency Fund to have a tax sum squirrelled away if needed for IRS April 2018.