Social Security Recipients: The Tax Withholding Choice That Can Prevent an April Surprise
Written by
Marc Guberti
Edited by
Zuri Anderson
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Seniors receive Social Security after contributing to the system for many years, but you still have to pay taxes on your benefits. This detail can catch a lot of people by surprise, but there is one tax withholding strategy you can use to prevent an April surprise.
“An unexpected tax bill in April is one of the biggest surprises I see retirees face. They have been living off of their Social Security benefits for the entire year, and all of a sudden, they find out they owe the IRS money that they did not budget for,” Steve Sexton, CEO of Sexton Advisory Group, told GOBankingRates.
Instead of getting stuck with a big tax bill in April, you can gradually pay off your taxes each month by withholding a portion of your benefits. You have to use Form W-4V to facilitate tax withholding on Social Security benefits and other forms of government payouts, such as unemployment compensation.
Here’s everything you need to know before making this tax decision.
Withhold Based on Your Preferred Percentage
Form W-4V offers flexibility for how much of your benefits you withhold. Retirees can choose to withhold 7%, 10%, 12%, or 22% of their Social Security benefits. That way, taxes are paid over time, and you won’t face a big bill in April.
“You’re paying as you go rather than rushing to make quarterly estimated payments or facing a penalty at the end of the year. This is the closest thing to having structure in retirement for retirees who are accustomed to having taxes automatically deducted from their paychecks, providing many with the benefit of peace of mind,” Sexton said.
It’s especially important to minimize your tax bill with Form W-4V if you have other income sources, like pensions, required minimum distributions (RMDs), part-time work or investment income. All of those income streams can push you into a higher tax bracket, which can turn tax withholding into a valuable option.
Who Should File Form W-4V?
Your annual income dictates how much of your Social Security benefits are taxable. While you may not need to withhold Social Security benefits if it’s your only income source, Sexton said people with multiple income sources should be among the first in line to fill out this form.
“I advise retirees with multiple sources of income to look into this right away. There’s a good chance that a sizable amount of your Social Security benefits is taxable if you also have withdrawals from a traditional IRA or 401(k), pension income, part-time employment, or investment income from a brokerage account,” Sexton said.
“For those who don’t enjoy the discipline of setting aside estimated tax payments on their own each quarter, W-4V is particularly helpful. It completely eliminates the choice. It operates automatically once you choose your rate and submit the form to the Social Security Administration.”
Sexton suggests avoiding withholding if you are on a tight budget or are in a low tax bracket after all of your income is tallied.
“The withholding route might be unnecessary for anyone who already makes consistent quarterly estimated payments and has a clear understanding of their tax situation,” Sexton said.
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