How much should I deduct from my pension salary as taxes?

Determining the Amount to Withhold for Taxes

When you start receiving a pension, you can choose to have federal and state taxes withheld from your monthly checks. The goal is to withhold enough taxes so that you don’t have to pay large amounts when you file your tax return. You also don’t want to receive a large tax refund, unless you enjoy lending money to the U.S. government.

When to Change the Amount Withheld for Taxes from Your Pension

When you are working, you can change the amount withheld for taxes from your paycheck each year. In retirement, you can also do this. When your tax situation changes, you’ll want to adjust your tax withholding.

Changing the Withheld Amount When You Start Receiving Social Security

Many retirees who receive a pension are surprised by the increase in taxes when they start receiving Social Security. The amount of Social Security benefits subject to tax depends on your other income sources. If you started your pension a few years ago and have now begun receiving Social Security benefits, you may need to increase your tax withholding.

Changing the Withheld Amount When You Turn 72

When you turn 72, you must begin to withdraw money from traditional IRA accounts and other qualified retirement plans, such as 401(k). These withdrawals are included as taxable income on your tax return. You typically want to have taxes withheld from these withdrawals.

Frequently Asked Questions

How is retirement taxed?
Retirement is fully taxed at ordinary tax rates if you did not contribute to anything in retirement. If you contributed after-tax amounts to retirement, your pension payments are partially taxable. If you begin payments before age 59½, you may also be subject to an early withdrawal penalty of 10%.

Do I have to pay taxes on Social Security?
You must pay federal income taxes if you meet certain common income thresholds based on your marital status. Combined income includes adjusted gross income, tax-exempt interest, and half of your Social Security benefits. For example, if you file your tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your income exceeds $34,000, you may have to pay taxes on up to 85% of your benefits. Taxes are limited to 85% of your Social Security benefits.

Was this page helpful?
Thank you for your feedback! Please let us know why!

Sources:
– IRS. “2021 Instruction 1040.” Pages 62-73.
– IRS. “About Form 1040, U.S. Individual Income Tax Return.”
– IRS. “Publication 505 Tax Withholding and Estimated Tax.”
– IRS. “Retirement Plan and IRA Required Minimum Distributions FAQs.”
– IRS. “Retirees: Avoid a Surprise Tax Bill; Get Enough Tax Taken Out of Pension Payments; IRS Withholding Calculator Can Help.”
– Social Security. “Income Taxes and Your Social Security Benefits.”

Source: https://www.thebalancemoney.com/how-much-in-taxes-should-i-withhold-from-my-pension-2388962