First Tax Return Since Retiring--OUCH!

[target2019]

I was outta there 2-28-2020, with working spouse (the best ever) continuing the good fight. After completing 2019 taxes, that is when the real fun started. Filled in the estimated taxes worksheet and found no estimates payments required for 2020. Also used the What-If worksheet for 2020. Inputs were:
- Her income and Fed Tax to be paid throughout 2020.
- My final numbers from Jan & Feb.
- Applied a $2300 refund (2019) to 2020.
- Estimated dividends and qualified dividends
- Annuity income about 50% taxable
- $20K Roth conversion

Tax loss harvesting was used as an opportunity to re-balance some winners and redeploy proceeds carefully.

I checked my numbers in the What-If Worksheet again in December, and decided to send in a $1,500 4th Q payment. Now that I'm finished 2020, I see that I was off by about $1,000, and will apply that refund to 2021.

 

[Surewhitey]

2020 was an awesome year for us. First year / time to utilize the SEP 401k. Socked away a massive % of my coastRE income... We also paid additional taxes via DW's company in Nov and Dec to cushion the blow for my taxes due thanks to the advice here.

We're getting over half of this back due to the SEP 401k surprise. Even with the reduced w*rk, I'm so ready for RE. Just have to wait for her comfort zone (or work event to force our hand). Not that 2020 was a great year for it...

Years like these makes living in TX a tax blessing... Otherwise I'd be back in CA.

 

[molly312]

My spouse did a Roth Conversion, passed away suddenly in Aug. We were slammed. Then 2021 filing as a SINGLE is going to be
a huge hurt.

 

[target2019]

My spouse did a Roth Conversion, passed away suddenly in Aug. We were slammed. Then 2021 filing as a SINGLE is going to be
a huge hurt.

Sorry to read about your loss.

Tax law can be so absolutely unfair, as in your situation.

 

[PERSonalTime]

First full year of retirement here. Came out golden on the Federal side. But this was largely due to having been short changed on the two stimulus checks (based on my pre-retirement salary) and recouping the difference on the tax return.

Got dinged a little on state. Didn't realize they too penalize early traditional IRA withdrawals. Never dawned on me to check. Oh well.

Why did you make early T-IRA withdrawals

 

[SecondCor521]

2020 is my highest tax year ever by more than double, but at least I had withholding work out close, so no big check due. I broke into 6 figures on fed income tax alone payed for 2020. I earned more than double my next highest year due to severance, "completion bonus" and working massive overtime early in the year due to covid lock downs. I even paid the FICA cap twice (which helps keep my tax due down) by virtue of being transferred from former mega-corp employer to secondee status under a 3rd party contract for the last 6 months. It was a good year to make sure I'm sick of work forever and also for a nice paycheck going out the door. My tax return is amazing to me though, never before and never again. Glad that's over

I'm not sure exactly how to parse what you're saying here. But if your W-2 wages exceeded the FICA maximum taxable amount of $137,700 in 2020, then you are entitled to a refund of the excess SS (not Medicare) taxes withheld from your paycheck. That refund of excess SS taxes should not affect any other tax items on your return (other than getting you a bigger refund)

See the Form 1040 instructions for line 10 of Schedule 3, which can be found on page 101.

If you've already filed and the amount is worth it, you should be able to e-file an amended return to get the money back.

If you're saying that you already accounted for that excess on your Schedule 3 line 10 and that's why you have less tax due, then never mind.

 

[Agapostemon]

No more W-2s!

One nice thing about retirement is that your tax returns are no longer at the mercy of W-2 withholdings. During our working years, we always had either big payments or big refunds. It was maddening.

We now manage our income to stay just under the ACA cliff. Since it's mostly capital gains and dividends, we usually owe zero federal tax. We've had a few rude surprises with state income tax, though. I've learned to overestimate the estimated payments.

 

[Gumby]

One nice thing about retirement is that your tax returns are no longer at the mercy of W-2 withholdings. During our working years, we always had either big payments or big refunds. It was maddening.

We now manage our income to stay just under the ACA cliff. Since it's mostly capital gains and dividends, we usually owe zero federal tax. We've had a few rude surprises with state income tax, though. I've learned to overestimate the estimated payments.

Helpful hint for those who are still working - you can calculate how much will be withheld from your pay by referencing this IRS publication https://www.irs.gov/publications/p15t. Or you can just wait for your first paycheck of the year and use that. Then you submit a new Form W-4 to your payroll office to ensure that your total withholding by the end of the year will match your estimated tax obligation. You add dependents to reduce withholding or, as was almost always the case with us, claim zero dependents and add an extra amount per paycheck to increase withholding. I used to adjust our W-4's every January.

 

[ShadowBloom]

Last year was the first year I sold fund shares to raise cash for the year--had been mostly living off inheritance 'til now. Before I sold, I'd looked at the estimated gains and thought it wasn't bad. Turns out, they only showed estimated gains on the covered shares, which was a small portion of the sale. My taxes were not fun.

 

[aja8888]

Markola, really? That's similar to our situation, except that I had a (what I thought was small) Roth conversion of $30K. Besides, that my hubby made $38K from his j*b and $12K in UE ($10.5K of which isn't taxable, due to the recent legislation); I made $16K from my j*bs; and my daytrading profit was $44K. And we're writing a checks for Federal and State combined of $10,500.

Standard deduction was best for us too.

Do those numbers make sense to people? Or did I goof something up?

Please let me know what recent legislation renders part of the UE not taxable. My daughter was paid $13 K in UE last year and I thought it was ll taxable.

Thanks.

 

[SecondCor521]

Please let me know what recent legislation renders part of the UE not taxable. My daughter was paid $13 K in UE last year and I thought it was ll taxable.

Thanks.

Not the person you asked, but it's Section 9042 of the American Rescue Plan Act, HR1319 which became Public Law 117-2 on 3/11/2021. It's colloquially known as the stimulus bill and is most famous for initiating the $1400 stimulus checks but there's a lot of other stuff in the bill.

https://www.congress.gov/bill/117th-congress/house-bill/1319/text

Also, as a minor note, it's only the first $10,200 of unemployment income, not $10,500. And states may choose to make the income taxable at the state level, so your daughter should check on what her state is doing. The law is so new that I think most states likely haven't yet decided or implemented any responsive legislation.

(And you're right, unemployment income is normally taxable. Just not in 2020 for the first portion for those who meet the requirements.)

 

[Agapostemon]

Highlighting W-4 guidance

Helpful hint for those who are still working - you can calculate how much will be withheld from your pay by referencing this IRS publication https://www.irs.gov/publications/p15t. Or you can just wait for your first paycheck of the year and use that. Then you submit a new Form W-4 to your payroll office to ensure that your total withholding by the end of the year will match your estimated tax obligation. You add dependents to reduce withholding or, as was almost always the case with us, claim zero dependents and add an extra amount per paycheck to increase withholding. I used to adjust our W-4's every January.

We also used to adjust our W-4s, maybe not every year, but definitely when we had a major change in income to adjust for. Over time, it became clear that we needed to withhold more than the worksheet of the time advised.

I just hope the guidance in current IRS document has improved.

 

[aja8888]

Not the person you asked, but it's Section 9042 of the American Rescue Plan Act, HR1319 which became Public Law 117-2 on 3/11/2021. It's colloquially known as the stimulus bill and is most famous for initiating the $1400 stimulus checks but there's a lot of other stuff in the bill.

https://www.congress.gov/bill/117th-congress/house-bill/1319/text

Also, as a minor note, it's only the first $10,200 of unemployment income, not $10,500. And states may choose to make the income taxable at the state level, so your daughter should check on what her state is doing. The law is so new that I think most states likely haven't yet decided or implemented any responsive legislation.

(And you're right, unemployment income is normally taxable. Just not in 2020 for the first portion for those who meet the requirements.)

Thanks,

She already filed her return and TurboTax did not pick this up. She is in Texas so no state income tax return to file.

 

[SecondCor521]

Thanks,

She already filed her return and TurboTax did not pick this up. She is in Texas so no state income tax return to file.

According to some popular news articles, the IRS seems to plan to automatically calculate and issue refunds people in her situation and are asking people not to submit amended returns. Here's one:

https://www.cnbc.com/2021/03/19/102...eak-irs-to-automatically-process-refunds.html

I'm quite dubious. This change affects AGI, which can have a cascading effect on a bunch of other tax items downstream from the AGI line. But who am I to question the IRS?

Anyway, she maybe should keep an eye on things.

Also if she's into tax optimizing, she should reevaluate her 2020 situation and see if her IRA contribution is better off in the Roth or traditional, whether or not an HSA contribution makes sense, etc.

 

[aja8888]

According to some popular news articles, the IRS seems to plan to automatically calculate and issue refunds people in her situation and are asking people not to submit amended returns. Here's one:

https://www.cnbc.com/2021/03/19/102...eak-irs-to-automatically-process-refunds.html

I'm quite dubious. This change affects AGI, which can have a cascading effect on a bunch of other tax items downstream from the AGI line. But who am I to question the IRS?

Anyway, she maybe should keep an eye on things.

Also if she's into tax optimizing, she should reevaluate her 2020 situation and see if her IRA contribution is better off in the Roth or traditional, whether or not an HSA contribution makes sense, etc.

Thanks for the link and update.

 

[dixter]

be careful... if your taxes are high that means your income is high and the Medicare people will fine you for making too much money ( or large Roth conversions) .... remember they use data that goes back two years... one year my monthly medicare payments went above $500... thats just another added on tax for ya...

 

[isisdave]

We didn't travel, so we didn't pull any money out of the traditional IRA.

We own a commercial condo we rent out, but due to covid income was down $15k

This lowered our AGI so much that only about 20% of SS was taxable. Got back all $7k we had withheld from SS.

 

[jollystomper]

One of my criteria for retirement was "I will not retire until I can afford to paid the taxes I will have to pay in retirement". Forewarned is forearmed .

 

[Octogirl]

2020 was the first year I was semi retired (DH retired 10 years ago) and we re getting a refund.
I w**ked only part time but was not sure if I had correctly estimated taxes due to income from SS, pension, rental income, part time w**k from 2 sources. We also did a $20k Roth conversion. One surprise was that (per H & R Block) we qualify for the tax deferral on Roth conversion. Anyone else using the tax deferral on tIRA withdrawal ?

 

[SecondCor521]

One surprise was that (per H & R Block) we qualify for the tax deferral on Roth conversion. Anyone else using the tax deferral on tIRA withdrawal ?

Not sure what you mean here.

First, Roth conversions and tIRA withdrawals are two distinct but similar things.

A Roth conversion generates ordinary income which is taxable but may or may not result in additional taxes depending on the rest of your return.

The money in a Roth conversion was growing tax-deferred in the traditional IRA and continues to grow tax-deferred in the Roth IRA.

Traditional IRA withdrawals also generate ordinary income, which is taxable but may or may not result in additional taxes depending on the rest of your return.

In 2020, there are a number of additional coronavirus-related provisions. If you were affected by coronavirus in some specifically defined way, you can avoid the 10% penalty on withdrawals on up to $100K. You can also spread the recognition of the income equally over three years (20/21/22).

RMDs were also not required in 2020, which is sort of a bit of tax deferral, but not directly related to Roth conversions and may not be what you meant.

...

In 2020 I did a Roth conversion. I did not avail myself of any of the other items mentioned above, either because they did not apply to me or I did not find them useful.

 

[Montecfo]

One nice thing about retirement is that your tax returns are no longer at the mercy of W-2 withholdings. During our working years, we always had either big payments or big refunds. It was maddening.

We now manage our income to stay just under the ACA cliff. Since it's mostly capital gains and dividends, we usually owe zero federal tax. We've had a few rude surprises with state income tax, though. I've learned to overestimate the estimated payments.

When working I simply adjusted my withholding to meet my tax obligation. I usually stayed within $500 either way.

You should not be getting either huge refunds or huge payments, but you have to do some calculating and fill out new w-4s as things change.

 

[Montecfo]

Helpful hint for those who are still working - you can calculate how much will be withheld from your pay by referencing this IRS publication https://www.irs.gov/publications/p15t. Or you can just wait for your first paycheck of the year and use that. Then you submit a new Form W-4 to your payroll office to ensure that your total withholding by the end of the year will match your estimated tax obligation. You add dependents to reduce withholding or, as was almost always the case with us, claim zero dependents and add an extra amount per paycheck to increase withholding. I used to adjust our W-4's every January.

One key here is you are adjusting "allowances", not dependents. I think that is what trips people up. They think they are stuck with a fixed number of allowances because they think it ties to dependents.

My allowances were usually 8 or more due to charitable giving or other deductions.

Now the calculations have changed but concepts are the same, complete the w-4 in detail to dial in your liability.

 

[Gumby]

One key here is you are adjusting "allowances", not dependents. I think that is what trips people up. They think they are stuck with a fixed number of allowances because they think it ties to dependents.

My allowances were usually 8 or more due to charitable giving or other deductions.

Now the calculations have changed but concepts are the same, complete the w-4 in detail to dial in your liability.

Your language is more precise. Thanks. The concept is that you are just jiggering the system to result in the proper withholding for your situation. It has no actual relationship to the real world.

 

[SoReadyToRetire]

be careful... if your taxes are high that means your income is high and the Medicare people will fine you for making too much money ( or large Roth conversions) .... remember they use data that goes back two years... one year my monthly medicare payments went above $500... thats just another added on tax for ya...

Thanks for the reminder, dixter! I turn 63 this year, which means this will be one of the years Medicare looks at. So I probably shouldn’t do any Roth conversions this year to hike up our income ( my younger hubby is still working).

Man, this is a lot more money management than I anticipated! You have to have all kinds of crystal balls.

 

[target2019]

Here is an IRS link that mentions not filing an amended return for UE tax relief:
https://www.irs.gov/forms-pubs/new-exclusion-of-up-to-10200-of-unemployment-compensation
"If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return at this time. The IRS will issue additional guidance as soon as possible."