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Mid-year estimated payments checkup

estimated payments checkup calculatorAs a retiree, you may have a bit more difficulty determining if your withheld tax throughout the year is going to be enough. This is especially true in 2018, with the new tax tables and rules associated with the Tax Cuts and Jobs Act of 2017. For this reason, you may want to do a mid-year estimated payments checkup, to help ensure you’re having enough (but not too much) tax withheld.

If you’re not retired or are retired and still working part-time, you may want to check out the Mid-year withholding checkup article to help make sure you have enough tax withheld.

There are commercial programs available to help you figure this out (check with your tax preparer or tax software), or you can use the IRS Form 1040ES to help you work through an estimated payments checkup. I’ll briefly describe the process below using Form 1040ES.

Estimated payments checkup

Go to the IRS website (www.IRS.gov) and search for Form 1040ES. The form itself includes the instructions for filling out the form, as well as vouchers that you can use to make estimated payments (if needed). This will help you with your mid-year estimated payments checkup.

You’ll need to gather quite a bit of information together for this form. I’ll step you through the process (high level) below, so that you’ll have an idea of everything you’ll need when you start working through the form.

You need to estimate your income for the year. This may include pensions, annuities, required minimum distributions (RMDs) from IRAs, 401k’s and other plans, plus interest, dividends, any rental, partnership or corporate income, and your Social Security benefits. Go ahead and project the total amount that you’ll receive from each source through the end of the tax year. For most of these payments, if they occur monthly you can just multiply the monthly amount by 12. If it’s a quarterly payment, multiply by 4. If it only comes once a year, just project the total amount to the best of your knowledge (use last year’s tax return and documents to help you with this process). Make sure that you count the gross amount, not the net check that you receive after taxes and other deductions!

Next, if you’re having money withheld from any of these payments, go ahead and project that amount for the year as well – just the same as you did with the payments you receive.

You’ll also need to understand a few things about your tax return filing in order to fill out Form 1040ES properly:

  • Filing status
  • Can anyone else claim you as a dependent? Same for your spouse if filing jointly.
  • How many jobs have you worked (or will you work) in 2018? Same for your spouse.
  • Will you or your spouse receive a taxable scholarship or grant in 2018?
  • Are you or your spouse age 65 or older in 2018? Blind?
  • Number of dependents (not including spouse) to claim on your 2018 return.
  • Number of children that will be claimed for child-care expenses, child tax credit, and earned income credit

You’ll need to estimate your deductions next. If you’ve always used the standard deduction in the past, chances are you’ll continue to use the standard deduction in 2018. If you have had circumstances change, such as buying a house, moving to a higher-tax state, you’ve made significant contributions to charity, or you have significant medical expenses (beyond insurance coverage), then you’ll want to go through the exercise of calculating your itemized deductions. The calculator steps you through the process of estimating your taxes, medical expenses, interest paid on mortgages, charitable contributions and other itemized deductions.

When you have all of the above information together, you can work your way through Form 1040ES and calculate any shortfall that you will have in withheld tax. The form is designed to limit your withheld tax to the minimum before a penalty is applied. This means that you only have to withhold 90% of the current year’s tax, or 100% of the previous year’s tax, and your shortfall can be up to $1,000 before a penalty applies to your situation.

Understand that you may owe as much as $1,000 or more in tax when you file your tax return if you follow Form 1040ES to the letter!

Your result will help you to determine what the amount of estimated payments are that you may need to make for the year (if required). You can also make adjustments to withholding on any of your income sources to make up a withholding shortfall, by submitting a new W-4P form to your pension administrator, for example.

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