Another New World for Retirees: The Tax Burden

Of all things that retirement brings, one of the scariest is potential healthcare costs.

Of course, it pays not to panic. Panic does not serve you.

And other things to prepare include paying off the mortgage if you can.

But there is another significant item that affects retirees.

Tax Care
When I worked in regular employment, taxes were withheld from my salary. At tax time, if I determined properly, I would owe a small amount, or receive a small amount as a refund.

Now, as a retiree, I must plan much more judiciously for taxes. Since I no longer have normal salary withholding to accompany my income, it is up to me to be sure I have paid enough taxes during the year.

From a mathematical point of view, paying gradually or all at once is the same. However from a money management point of view, and from a government tax collection point of view, there is a world of difference.

When I was self-employed for several years, I knew that I needed to pay quarterly estimated taxes, and I did. And I still do. However, there are some areas where I do not know the amount of income until after the year ends. That makes it difficult to plan for paying appropriate estimated taxes.

One area is the gain, if any, in mutual fund balances.

Pigeon Hawk. 1754.
Pigeon Hawk. 1754.

The Funds are Mutual
It is only at the end of the year that the gain for the year is determined. Until the end of the year, gains or losses are only on paper. So if the funds I own make large gains, especially towards the end of the year, I may need to pay taxes on some unexpected capital gains.

Those gains, of course cannot be planned for. One can easily have ended up with no capital gains or even losses.

From one year to the next, even if estimating other income correctly, one can easily have a large tax bill or a large refund. One can easily inadvertently underpay or overpay. Plus there is the downside of a penalty if underpayment is too large.

Is There a Solution?
Fortunately, there seems to be a path to a solution. Firstly, estimate more closely for the income that is more estimateable (is that a word?), and pay quarterly estimated taxes. Secondly, paying slightly more in estimated taxes is probably a better idea than less. Thirdly, have enough cash available to pay for any unexpectedly larger than normal tax.

How have you managed taxes as a retiree? Comment here.

The illustration of the Pigeon Hawk is from Volume 1 of “Natural History of Carolina, Florida, and the Bahama Islands: containing the figures of birds, beasts, fishes, serpents, insects, and plants: particulary the forest-trees, shrubs, and other plants, not hitherto described, or very incorrectly figured by authors. Together with their descriptions in English and French. To which are added, observations on the air, soil, and waters: with remarks upon agriculture, grain, pulse, roots, &c.”, by Mark Catesby and George Edwards, in 1754. Courtesy Biodiversity Heritage Library.

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