Question for the Money Doctors
Question submitted on Dec 4, 2021.
QuestionI am retired, married with a pension and Social Security. How much should I have set aside for Federal and State taxes on a monthly basis?
I recommend you figure out what tax bracket you fall into based on your anticipated total income, then back into the amount of tax withholdings you should have in order to avoid underpayment penalties and/or a surprise balance due on April 15th.
Your tax bracket depends on your taxable income (total income less deductions). For example, if your 2022 taxable income is between $83,000 and $178,000, you will be in the 22% tax bracket (so-called "marginal" tax rate). Since the tax brackets are tiered, income below $83,000 is taxed at lower rates (10%-12%). The following link includes the full 2022 tax bracket: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022
If the numbers show your effective tax rate to be, say, 15%, simply multiply your total estimated annual income by 15% to determine your annual tax liability. Then, divide that total tax liability by 12 (assuming your pension is received monthly) to calculate an amount to withhold each month. It may be easier for you to have taxes withheld by SSA or your pension administrator versus setting aside an amount for taxes and making quarterly estimated payments.
The same process applies to your state income taxes assuming you are in a state that imposes an income tax.
I hope that is helpful.
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