Paying taxes may not be thrilling, but for Social Security recipients, it holds great importance. Here are six compelling reasons why handling your tax obligations early is a wise choice.
Avoid Unwanted IRS Penalties and Interest
“The IRS wants taxes paid as you earn income,” says Paul Carlson, CPA and managing partner at Law Firm Velocity. Many retirees overlook the fact that if they have taxable Social Security or earnings from dividends or retirement withdrawals, quarterly estimated tax payments are necessary. Failing to pay on time can lead to substantial penalties and interest, accumulating much like a high-interest credit card. For example, if you file late, the penalty is 5% of the tax owed for each month overdue, and if you pay late but file on time, it's a 0.5% penalty monthly. Those extra fees can significantly chip away at your retirement funds if not addressed early.
Better Budgeting and Peace of Mind
Receiving a surprise tax bill can disrupt your entire financial landscape. Paying your taxes early or adjusting your withholding helps maintain budget clarity. Having taxes withheld throughout the year provides peace of mind and helps you to plan your finances better.
Protect Social Security Payments From Garnishment
Ignoring tax obligations can lead to severe consequences, including the potential for the IRS to garnish your Social Security payments. The Federal Payment Levy Program may take up to 15% of your monthly check to satisfy back taxes. Once the garnishment occurs, it won’t stop until the tax debt is fully paid, potentially leaving you short on necessary living expenses like groceries or medical care. Proactive tax planning can prevent this unwelcome scenario, ensuring your hard-earned benefits are protected.
Enough Time To Fix Complications
Filing taxes while receiving Social Security can be complex. This complexity warrants an early start to your tax preparation. Adam Hamilton, CEO of REI Hub, suggests starting early, noting that unexpected issues may arise that necessitate time for correction. With approximately 85% of Social Security benefits becoming taxable under certain circumstances, understanding your income and filing accurately is crucial. Starting your taxes early gives you the chance to identify problems, like underreported income or overlooked forms, and resolve them smoothly without the last-minute scramble that can lead to additional penalties.
Withholding Options
Instead of waiting until April, retirees can manage their tax obligations proactively. Paul Carlson recommends filing Form W-4V, Voluntary Withholding Request, to have taxes withheld directly from your Social Security payments. This simple strategy allows you to stay current with your taxes and could even create opportunities for refunds. When filing your return, the withheld amounts may offset taxes owed from part-time work or investment income, reducing stress during filing season.
Faster Refunds (If You’re Owed One)
Imagine expecting a refund after filing your taxes. Paying early means a quicker refund, providing timely access to funds. Whether you plan to use that money for important medical expenses or to indulge in a spring getaway, early filing ensures you aren’t waiting longer than necessary to receive your money. This advantage can be particularly valuable for retirees looking to take care of unexpected costs or enjoyable experiences.
Paying taxes early is more than a matter of meeting obligations — it protects your retirement income, lessens financial stress, and allows for better planning through effective tax planning for retirees. Take action now by considering your options, such as withholding taxes from Social Security benefits with Form W-4V, to solidify your tax approach and protect your hard-earned income.