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This post is an extension of Rick’s and Richard’s recent posts regarding taxes in retirement.
A recurring issue I dealt with as a tax preparer was calculating a (unpleasant) surprise the first year that someone retired. While working, the employee typically gets a paycheck with adequate tax withholding. When he leaves the job behind for the greener pastures of retired life, things can get a little more complicated. Now, instead of a single W2 to deal with, there may be forms from Social Security, pension(s), IRA distribution(s), and if they’re unlucky enough to have a commission hungry financial rep, multiple forms from annuities and K1s. If married, the forms may double in number. It was also very common for people not to realize some of their SS could be taxable.
So this is a cautionary post for those approaching retirement. Schedule an appointment with your tax preparer, or if you are a DIYer, use one of the tax calculators, or prepare a dummy tax return on your software in order to calculate your approximate tax liability.
Especially if there are lots of 1099s, I find it easier to not do any withholding, and instead arrange quarterly estimates for both federal and state taxes. I put these on autopilot (direct debits) from my checking, though many people prefer doing it the old fashioned way, by writing checks and mailing them in each quarter.
Great article, lots going on. I am 80 years old never made a quarterly payment. Here is my method, my RMD is done in Nov of each year. I have been doing my taxes since I have been 16. Currently I have developed a spreadsheet that mirrors Turbo Tax but just for my situation. I compare everything to the previous year. My entire withholding is taken from my RMD and in round numbers is 22% Fed, and 5% state. My method has avoided taxes for every year and I try to pay so I have a very small payment or small refund. I like to push the numbers, so at age 80, I take the maximum RMD without going into a higher tax bracket. As an engineer, I like to push the numbers.
You have an oxymoron (maximum required minimum distribution). I think you mean maximum distribution. Good strategy–I’m doing this for my mother-in-law.
This way that extra distribution above the RMD will be tax-free to her heirs instead of taxed as ordinary income.
I’m interested as to how you do the direct debit from checking. Can you explain? I’ve done it online, but not scheduled in advance. Is it just a matter of setting the scheduled date in the future?
For my part, I both pay the safe harbor amount, or more if I anticipate a bigger bill, and advise others to do so–right when we file the 1040 for the previous year. That eliminates withholding and forgetting both.
On the other hand, I also like and have used IRA withdrawals dedicated to taxes, often when I’m doing tax planning around November.
Steve, it was pretty simple. Below was copied from AI. Additionally, the system allows you to make changes to the estimated payments if the need arises during the year. For example, I cancelled the final two estimated payments in 2025 after the senior deduction was announced.
Choose Your Electronic Payment MethodThe IRS heavily encourages direct electronic payments. You do not need to mail paper Form 1040-ES vouchers if you submit online.
Dan,
Per Bill’s reminder I did a quick estimate of my 2026 taxes and I am withholding enough from my pension and Vicky’s SS to likely get about a $1,000 refund. So I don’t need to make a 9/15 estimate. If I decide to do a Roth conversion this fall, I may end up owing about $3500 based on the amount I am considering. I will pay this out of after-tax savings. If I make a 4th quarter estimated payment of $3500 will I meet the IRS criteria to avoid underpayment penalties? I think I will have to Form 2210 Annualized Income to demonstrate that the additional income came in the 4th quarter. I have filled this out in the past when my consulting income was lumped into the last 2 quarters of a year.
thanks.
I found my 2210 spreadsheet last night. I filed one in 2023. I updated it for 2026 before going to bed. Reviewing it, and thinking about a comment on another post on the mechanics of calculating the portion of SS benefits that are taxable, reinforced how complex are the actual implementations of some of the tax laws.
Rick, I’m going to ask Bill to correct me if I am wrong, but I’d say if you meet Safe Harbor (100 or 110% depending on your income), you should be home free. Otherwise, just file the 2210 and you should be good.
I read Rick’s comment “If I decide to do a Roth conversion” to mean if he chooses to do a fourth quarter Roth conversion he will not be in a prior year safe harbor for 2026.
For anyone having not done a 2210 before I have found the extra work, even using a robust tax software package, may not justify the time and the extra tax preparation cost if you are using a paid preparer. In the work category I also recall the pain of splitting income between the four income periods for 2210 purposes that are not the same as calendar quarters. I further recall the continual tax software updates during tax season which can sometimes change the 2210 calculation on a completed return. As you both know if there is a balance due the penalty may not be cut off until the earlier of final payment being received by the IRS or the original due date of the return without extension.
I like to use 2210 to mitigate penalty for income surprises that occur late in the year. If I know the income is coming I will do my best to get to the safe harbor amount if I can or pay enough to chop off the penalty when the IRS receives the final ES or extension payment.
The typical income surprises often seems to occur when moving from a high tax year to a low tax year, think work stoppage at retirement. Besides the 100/110% prior year safe harbor there is also the separate 90% of the current year tax safe harbor to consider.
Those are my thoughts. If the default 2210 penalty is tiny I have in the past while I was still working called the client and asked if they want to pay me an additional $3X to save a $X penalty. The answer was usually, but not always, no.
Bill and Dan. Thanks for your thoughts. We are indeed moving form a high tax to a low tax year, due to the sale of our vacation home last year and some other things we did. Actually, 2026 is a very boring year financially. Meeting the prior year safe harbor amount would not make sense. I would make an estimated payment to assure I met the 90% current year threshold, it’s more the timing issue. I’ve done the 2210 before, and I think I have a spreadsheet somewhere set up with the strange dates. I think that is my best bet should we do a 4th quarter Roth conversion.
For fun I asked Claude.AI if, given the relevant data, it could generate a form 2210. He (it?) initially answered for 2025. When I replied I meant 2026, he gave me a coherent explanation of the topic and invited to come back at the beginning of tax season when the 2026 Form 2210 is available.
thanks for your help.
“He (it?)” I think the correct/safe pronouns now are they/them if you are unsure of Claude’s gender.
I am averse to seeing my SS or annuity payments dinged by withholding, and since the IRS credits tax payments from RMDs at the end of the year as though made throughout the year, that’s when I settle up. Same goes for Estimated Payments: Why pay early what I can pay later? For me, RMDs have the feel of “found money,” even when our Uncle has taken his share before I get what’s left. I agree with others about hitting the safe harbor as essential in all these transactions.
I concur with Chris’s comments. In the past I made quarterly estimated tax payments. After seeing a WSJ article about using RMDs to pay your estimated taxes, I now make one RMD withdrawal for my taxes in the November/December timeframe.
Making your RMD late in the year gives you a lot of flexibility in hitting your projected current year tax liability by having the amount you have withheld be considered as a timely payment withheld equally through out the year while allowing the entire RMD amount to continue to earn investment income for most of the year of distribution.
For a couple filing using married filing jointly status I also like the late in the year RMD and targeted withholding in your go-go and slow-go years. When a MFJ status couple or a single taxpayer reaches their no-go years I favor a early in the year RMD as I saw multiple instances that due to a late in the year death the RMD was not timely made and the surviving spouse or heirs now have to deal with an unexpected additional tax issue that could be avoided. The requirement to take a timely RMD survives death.
The ability to be able to choose to wait until late in the year to take your RMD is often not available to those who need the IRA distribution for needed expenses.
When and how do you determine your tax bill before taking your RMD?
No spreadsheets! I keep a simple Word document and track all ongoing income sources (SS, annuity, investments, etc.) and required RMD amounts for the current year, as well as all expected deductions (I’m an itemizer), together with my safe harbor amount from the previous year’s filing.
A few have said that you have all or much of your withholding done from a single 1099R. Married clients of mine did this, having $7K withheld from a $11K distribution. Finally, one year, their income went down significantly, but they did not change the above mentioned withholding, resulting in a huge refund. The return was pulled out of efile for manual processing. I called the preparer hotline at the IRS several times on the clients behalf, and the representative agreed with me that the service likely thought the withholding was a typo, and added that note to the clients file.
It took the IRS three years to issue the refund. Fortunately the client, now a widow, did not need the money immediately.
So my advice to those of you that withhold in this manner; don’t.
I’m a DIYer and have used H&R Block software for many years. I hadn’t realized that I’m already pretty prepared for this because I typically get multiple 1099s for book royalties and sometimes for speaker fees. My husband has been getting a pension for 10 years. So we have W2s, 1099-Rs, and 1009-MISC (the royalties/fees), along with various interest statements.
All that said, this is one of our most complicated tax years ever: I retired in the middle of last year, so this is my first year without paychecks but with pension checks (and fewer deductions). My husband is going to half-time on October 1, so his income will drop year-over-year. We bought a house and sold one—no capital gains tax will be due on that, but we will have to account for it. We’ve had two different mortgage payments, and they overlapped for a couple of months. Oh, and we’re going to take money out of an IRA to help pay for our upcoming renovations.
I’ve plotted this all out using the H&R Block planning tab and know about what our safe harbor number is, but it will be interesting to see if this is finally the year that I throw in the towel and get someone to do it for me.
Your detailed comments about income and deductions reminds me of a few tax trap errors I have seen in the past that are best to be avoided –
1099’s come in a number of flavors. I have seen payments for book royalties reported on 1099-Misc and not 1099-NEC. Book royalties for authors are earned income that should be reported on schedule C and not schedule E and are of course subject to self employment tax on the net schedule C income as well as part of your taxable income. A side note is the IRS brought back the 1099-NEC form beginning for tax year 2020 after having discontinued it after tax year 1982 mostly because of this type of tax reporting errors that was occurring.
If you have positive net self employment income you may also be entitled to claim the above the line deduction for any health insurance expense paid during the tax year available limited to the available positive amount of your self employment income. Also think about the SE income in terms of potential IRA contributions for you if such contributions makes tax sense.
The sale of your home is typically reported by the title company on form 1099-S. The trap is the closing statement (noted in the fine print of your closing documents) is often a substitute 1099-S and you will not receive a separate 1099-S at tax time. The IRS computer will be looking for the gross sale amount of your home from the electronic 1099-S filing they receive on your 1040. Your 2026 1040 will need to have the sale reported to avoid any mismatch and you need to claim an adjustment for a qualified sale of your residence under IRC 121 to get to the zero amount of taxable income from the sale. You report the sale of a residence on Schedule D (Form 1040), usually flowing from Form 8949.
Scour your closing statements for items that impact itemized deductions if you itemize. Typically property taxes for the current year have to be prorated between seller and buyer and prior year property taxes may also be deducted on closing statements. Other items on the settlement statement may likely also impact your tax reporting.
When you own two homes during the year the tax rules allows you to deduct mortgage interest on a combined total of up to 750K of home acquisition debt (for married filing joint) if your loans were taken out after December 15, 2017. If your combined loans are over the 750K limit for a period of the tax year you own both homes then your deductible interest is limited during that >750K period via you limiting with the interest prorated.
Moving is often a time of charitable giving of non cash tangible personal property to a qualified charity.
Hope my thoughts help. Your 2026 tax file will be fat. You can do it Dana.
Best, Bill
Thanks, Bill! A couple of months ago, I made an electronic file of documents from the sale of our home, which include the 1099-S, a California form (593), and the closing statements from our sale in May and our purchase in 2019. I had a feeling that my April 2027 self would thank me for this. I’m glad to know about Schedule D, too.
I’ve always gotten confused about the royalty stuff and Schedule E vs Schedule C–I have to remind myself every year how it works, having done it wrong once or twice.
The mortgage interest stuff sounds complicated. Hopefully the software can walk me through it!
For the 2025 Pub 936 (worksheet page 14) for an example of how you do the calculation. The 2026 version of the worksheet typically comes out late 2026 or early 2027 timing usually depending on if congress makes any late in the year changes to this part of the tax law.
I am not current on CA tax law and what differences there are from federal tax law.
Best, Bill
Sounds like you have a good handle on it, Dana. Once you get past 2026, things may smooth out for you.
Dan, I consolidated with Fidelity just because I was getting forms from multiple sources. It’s easier now.
I favor withholding on everything possible. Few or no bad surprises when filing. I have withholding from pension and social security. I have withholding from my RMD and take extra to cover taxes on interest and dividends.
Dick, I would say to both you and Mark (below), that it doesn’t matter how the cat gets skinned, as long as you get it skinned.
The poor /ᐠ｡ꞈ｡ᐟ\
Yes, I’m glad Sophie the Wonder Cat can’t read.
Interesting. I’ve always attacked it from the opposite side and tried to use withholding since that eliminates any potential income matching underpayment penalties and taxes that, my understanding is, could attach to quarterly payments although I guess compliance w the Safe Harbor provisions would resolve that. Plus, no additional IRS paperwork that may be necessitated by quarterlies. . This year and the next few may present more of a challenge as I anticipate large Roth conversions making both Safe Harbor compliance and adequate withholding unlikely. My anticipated approach is to take IRA distributions late in the year with oversized withholding to cover the tax but haven’t completely thought this through.
I like that approach as well. I’ve used the safe harbor and withholding route the past few years and will continue to. I like the Traditional IRA distribution with oversized withholding if needed to meet the safe harbor number.
For the past seven years I have paid my quarterly taxes via one of my inherited IRAs. The withdrawal is set up so the entire check goes to the IRS. Since that account will run dry next year I am planning for my small pension to go entirely to the IRS. This will cover 75% of our tax liability. For the additional amount I most likely will take out a quarterly amount directly from my traditional account and have 100% go directly to the IRS.
I think this is the easiest way to attack the problem. I don’t have to know a mailing address for the IRS, nor go to an IRS website. Vanguard takes care of the entire process. For my part it takes maybe 2 minutes of my time.
Dave, are you saying that you have 100% of the distribution withheld for taxes?
If you are at Fidelity, they will only allow you to have 99% of a distribution withheld. I have no idea why. I do withhold 99% of both of my inherited IRA distributions for Federal and state taxes. One of them is a Roth, but you can still withhold taxes from it.
Yes
Dan, great thoughts on a topic that is a big change for many of us. When I first started consulting at 60 my income was not regular, and I used form 2210 to annualize my income to prevent an underpayment and penalties/interest. My income varied from year to year, especially during Covid, so the safe harbor method (pay 100% of previous year’s tax) wasn’t always attractive. It gave me an appreciation for the challenges self-employed taxpayers face.
Oh boy, self-employed tax returns can be challenging for us preparers as well. I recall a client who struck out on his own. He was a highly skilled carpenter but had no clue (or desire to learn) how to keep business records. When he decided to go into the food-truck business, I suggested he find an accountant/tax person with experience doing restaurant tax returns. I did not need the aggravation.
Good thoughts in your article Dan.
My preference to make estimated payments is using IRS Direct Pay. No IRS personal account, no login, immediate online confirmation of the payment and amount is drafted from my bank account. Typically all the information you need to use IRS Direct Pay is found on your immediate prior year 1040 tax return assuming you have already filed the immediate prior year return (if not filed then you can typically use the year last filed).
As for the amount of the current year estimated payments I like to use the prior year tax safe harbor amount which is 100% of your prior year tax (or 110% if your prior year adjusted gross income was $150K or more) paid in equal quarterly payments.
If my needed current year tax payments are small I have just paid the entire year estimated taxes in the first quarter. If I am making quarterly safe harbor estimated tax payments I will project my current tax late in the current year and play the game of how close to zero tax will I owe when I file my return by adjusting the final quarterly payment but I usually do not pay less than the safe harbor amounts in a timely manner.
As you know the 2026 third quarter ES payment is due 9/15/2026 is less than a month away.
I would also note for those who insist in mailing estimated payments the postal service postmark dating has changed in 2026.
The IRS “timely mailed, timely filed” mailbox rule itself has not changed under the law, but a U.S. Postal Service (USPS) rule update means machine postmarks now reflect when mail is first processed at a regional sorting facility rather than when it was deposited, risking delayed postmark dates for paper tax filings.
Even before the USPS change if the IRS did not deposit your check by the due date you often have a argument you do not want with the IRS computer and if the check is lost then your certified mail return receipt only proves that you mailed something to the IRS, not necessarily a check. I try hard to not mail any checks, I just have seen to many things go wrong.
I hope my thoughts help.
Bill
Bill, thanks for the great information. I have also used IRS Direct Pay with no issues. I also enjoy playing the “how close to zero” game with our tax return. If I owe $1,000 or less at tax filing I consider it a win.
Funny. For tax year 2025, I arranged for four $300 quarterly payments. When the new senior deduction was signed into law, I canceled the remaining two estimates. My refund for the year ended up being exactly $600, the amount of the first two estimates. I could not do that again no matter how hard I try.
William, thanks for your outstanding elaboration on this subject. Regarding mailing a check versus using IRS Direct Pay. There remain taxpayers out there who don’t trust anything internet, and insist on using snail mail. I have processed thousands of tax returns and never had any internet related issues. I cannot say the same where human hands are involved; sometimes its hands at the post office, sometimes hands at the IRS, frequently it was the hands of the taxpayer.
Here in Michigan, the state has totally messed up their tax collection system with a “system upgrade.” Thousands of taxpayers, including myself, received notices of short payment on estimated taxes paid electronically or by check. Penalties and interest were accessed and refunds were not paid. This is still unresolved for the 2025 tax year.
Shame on Michigan, Harold. If there is a silver lining to this situation, it is that the state will pay you interest on the delayed refund. If AI is to be believed, the current rate is 7.85%.