Pay taxes on Pension payments
I receive a one tome payment in December from a pension plan. They deduct 10% automatically for "taxes", but I always get it refunded when I file my taxes. How can I find out how much I can increase that payment without having to pay any tax.??
Answers
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Hi Azulasmom,
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You'll need to contact the Plan Administrator of the pension plan directly to change the amount of withholding tax. There should be an 800 number on a statement or their website.
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Some pension distributions may be subject to an automatic 10% tax penalty if it qualifies as an early retirement distribution. This 10% is automatic for any early retirement distributions, and will apply regardless of the size of the distribution. Though, there are some exceptions to the 10% penalty that, if you qualify for, means that the penalty will not be applied to your return. The IRS has a quick list of these exceptions here:
Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service
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First off, whether or not your pension payments are taxable depends on whether or not it was funded with pre-tax contributions or after-tax contributions. But it sounds like the pension income that you have may technically be taxable, since there is some tax being withheld. It is possible that your tax withheld doesn't match your tax situation. What also could be happening is that you are paying a 10% penalty on your return.
Assuming that your tax is being withheld for a regular 10% tax, what may be happening then, on a very basic level, is that your total income is less than your deduction. That results in your taxable income being $0, and thus $0 of tax.
It sounds like your income is being taxed at the lowest tax bracket (10%) automatically, and this amount is being refunded when you file your tax return, because as mentioned before, you presumably don't have any taxable income.
Generally, for one to find out how much they would have to increase your retirement payment amount and not pay tax, you would need to add up all sources of income that they have and then subtract the deduction from this amount. Let's say that someone has a deduction of $14,600 and $11,000 of income. This means that they could take $3,600 more income at $0 tax ($14,600-$11,000). If your income exceeded your deduction, you would only pay tax on the amount that is over. Going back to the previous example, if you had income of $14,800, then only $200 is taxed since the deduction amount was $14,600. Again, this is a very generalized approach and doesn't take into consideration several different tax scenarios.
