We all look forward to retirement. If you recently retired and are taking distribution from a retirement plan, some of your benefits may be taxable. The Retired Life Event topic will provide information on the following information:

If you are under 59 1/2 years of age and took an early retirement, see the Life Event - Premature IRA/401(k) Distribution. 

Types of Retirement Benefits

Social Security Benefits
Social security benefits include monthly survivor and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable.

If you received Social Security benefits during the year, you should have received a Form SSA-1099. To find out whether any of your benefits are taxable, compare the base amount for your filing status with the total of:

1. One-half of your benefits, plus
2. All your other income, include tax-exempt interest

Your base amount is: 

If part of your benefits are taxable, how much is taxable depends on the total amount of your benefits and other income. 

Generally, the higher that income total amount, the greater the taxable part of your benefits. Usually, the taxable part of your benefits cannot be more than 50%. However, up to 85% of your benefits can be taxable.

Pension
Personal retirement plans can be fully or partly taxed depending upon your contribution to the retirement plan.

Generally, the amounts you receive each year are fully taxable and must be reported on your income tax return if: 

The amounts you receive each year are partly taxable if you paid part of the cost of your annuity. You are not taxed on the part of the annuity you receive that represents a return of your cost. 

The rest of the amount you receive is taxable. Your annuity starting date determines the method you use to figure the tax-free and the taxable parts of your annuity payments. 

IRA
Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.

If only deductible contributions were made to your traditional IRA(s) since it was set up, you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received.

If you made nondeductible contributions to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

Only the part of the distribution that represents nondeductible contributions (your cost basis) is not taxable. If nondeductible contributions have been made, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if any). Until you run out of basis, each distribution is partly nontaxable and partly taxable.

Withholding Tax on Retirement Plans

The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. You can choose not to have tax withheld.

If you have a source of untaxed income, you will need to make estimated tax payments. The federal income tax is a pay-as-you-go tax. You must pay the tax you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated taxes. 

Generally, you have to make estimated tax payments if you expect to owe taxes, including self-employment tax of $1,000 or more, when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated tax payments, you may pay any tax due when you file your return.

Quarterly Estimated Payments
If you need to make Quarterly Estimated Payments, the schedule is: 

Self-Employment Tax

If you do not pay enough income tax and self-employment tax for the tax year by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid.

The IRS will figure the penalty for you and send you a bill. Or, you can use Form 2210, Underpayment of Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. For more information, see Publication 505 (PDF).

[ Home ] [ Up ]

Send mail to taxation1@comcast.net with questions or comments about this web site.  Copyright © 2002 Doug's Tax Service Last modified: December 27, 2011