Last updated on November 14th, 2021 at 05:01 pm

There is a good chance you will owe at least federal income taxes. This is the sad truth is that while president Rosevelt promised that social security annuities would NEVER be taxable, he lied. Read the truth about the first social security promises at the Social Security Website here. It all goes downhill from there. In 1984, congress began collecting taxes on a portion of your social security payments. Now it’s up to 80% are eligible for taxation.

Let’s start with a discussion about Social Security. This is how it works. For those at the lower end of Social Security benefits and without any other outside income, they will probably not pay any federal taxes. If you are earning the maximum Social Security benefit, you will likely be taxed. Why? Because many of the top Social Security earners, have put money away and have earned interest and dividends from their investments.

When you add this other income to Social Security, you will probably make too much to avoid being taxed on the total income (less the 20% that is not currently taxed). It is the non-Social Security income added to the Social Security income that makes the total high enough to create a tax burden.

So you have decided to take funds from your 401k or IRA, bang, a tax bill. Add the amount you withdrew to your Social Security less than 20% of Social Security and you can see that your tax bill just grew. For those of you who may have a tax liability and are not being paid on a w2 form, you will have to make arrangements to make quarterly tax payments.

Some pensions are taxable, if so, you must add your Social Security annuity to the gross income from the pension and pay taxes on the total (fewer deductions of course).

You set up an account at EFTPS.gov where you can use your computer to make tax deposits. For those who have just retired, you are not experienced with making tax payments because funds were taken from your paycheck. Do not wait until tax reporting time to pay, if you owe more than 10% of your tax burden, the IRS can make you pay a penalty and other fees.

Many people calculate that they will pay a little e.g. under 10% so they wait until tax filing time. This is a good strategy. Should you take a taxable withdrawal from retirement or receive taxable income even one time that pushes you over 10% you may pay a penalty. The best thing is to set up an account for payment in case you need to.

It’s a good idea to create a tax plan to include state income taxes as well. Fortunately for me and others living in Mississippi, we pay zero state taxes on any retirement income. Yes, zero taxes on 401k withdrawal, pensions, social security, the whole thing. Perhaps your tax planning involves moving out of a high tax state where retirement income is taxed and moving to the Mississippi Gulf Coast where it is not. We are still talking here about state income tax liability. You can not escape the federal liability except through good planning and an equally good CPA.

Now I will add an editorial. Social Security benefits in my opinion should not be taxed. This is a regressive tax on the individuals in our society who can least afford to pay it. President Rosevelt promised no taxes on Social Security. There is still a small sliver of 20% that is currently not taxed. I do not doubt that some bureaucrats are looking at that 20% that could be used to fund X.