Estimated Tax Payments and Retirement: What You Need to Know

Updated for tax year 2023.

If you’ve been an employee all your working life, you’re probably used to having income tax withheld from your pay. However, when it comes time to retire, you might be surprised to find you may need to make estimated tax payments on your income four times a year.

At a glance:

• You may need to make quarterly tax payments in retirement.
• There are several ways to make estimated tax payments, including mail, electronic funds withdrawal, or the IRS online payment system.
• Late payments may lead to penalty charges, but these can sometimes be abated with a written request.

For some people during retirement, the days of simply filing a tax return at the end of the year and paying any taxes due are gone. In fact, if you did not make estimated tax payments when you were supposed to, you may owe penalties and interest on the amounts you should have paid throughout the year.

So, how do you know if you need to make estimated tax payments in retirement? Are there any alternative options available to you? Here are our answers to some of the most asked questions about estimated tax payments.

Do I need to make quarterly estimated payments?

If you have substantial income from investments, taxable retirement plan withdrawals, or other sources from which you do not have income tax withheld, you probably need to make quarterly estimated payments to avoid penalties and interest.

However, you may owe little to no federal income tax if your income is low. For instance, you won’t owe a penalty if you owe less than $1,000 after you file your taxes.

If your income was modest in the previous year, the safe harbor rules may also keep you from owing penalties and interest. The safe harbor rules apply if you paid at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is smaller.

If your tax liability last year was $0, you typically don’t have to make estimated tax payments throughout the current year.

The easiest way to determine if you will owe more than $1,000 in tax for the year is to use the TaxAct® Income Tax Calculator to estimate your income taxes.

Can I avoid estimated tax payments?

Thankfully, it’s not hard to make estimated tax payments. However, if you really don’t want to be bothered with them, there are two alternatives:

• Increase withholding on income. You can have income tax withheld on retirement withdrawals or other types of income. If your spouse is still working, they might consider increasing their income tax withholding.
• Take more withdrawals from tax-free retirement plans. For example, if you have both Roth and traditional IRAs, you can plan your withdrawals to minimize your taxable income for the year.
• Practice good tax planning. Planning your tax year carefully is always a good idea, and making estimated tax payments can be a helpful motivation to do so. Consider taking steps such as making charitable contributions and paying deductible expenses before the end of the year, avoiding taking more taxable retirement withdrawals than you need, and selling investments that have decreased in value when it is tax-advantageous for you to do so. By taking these actions, you may be able to reduce your taxable income and potentially avoid owing estimated tax payments in the future.

How do I make quarterly estimated tax payments?

If you need to make quarterly payments, you can calculate the amount you need to pay with TaxAct’s Income Tax Calculator and print out quarterly payment vouchers. Each quarter, you’ll need to print a voucher, attach a check or money order, and mail it to the IRS by each voucher due date.

If you’d rather pay electronically, you can set up Electronic Funds Withdrawal (EFW). This can also be done through TaxAct, and your quarterly payments will be deducted from your bank account automatically.

The IRS also has a free payment system called the Electronic Federal Tax Payment System (EFTPS). You can set it up at www.eftps.gov/eftps. However, you’ll need to plan ahead to use EFTPS as it requires you to receive an EFTPS Personal Identification Number (PIN) and set an internet password.

Another option is to make your payments by credit or debit card using the IRS’s phone system and website. This should be a last resort because you’ll likely pay an additional convenience fee to your bank with this method.

Don’t forget you may also need to make state estimated tax payments if your state has an income tax.

Estimated tax payments are due on April 15, June 15, Sept. 15, and Jan. 15. When a due date falls on a weekend or holiday, the due date is the following business day.

I recently retired but haven’t made estimated tax payments. Am I in trouble?

If you recently retired and didn’t know you needed to make estimated tax payments, go ahead and relax on this one. Trust us, you’re not the first retiree to be surprised by the requirements for estimated tax payments.

The worst that can happen is the IRS may charge you penalties and interest based on the difference between when you should have made payments and when you actually paid. In some cases, if you end up with a penalty, you may be able to have it abated. To receive this potential abatement, you’ll need to write the IRS, explain the situation, and specifically ask for an abatement of penalties.

The bottom line

Navigating estimated tax payments during retirement might initially seem overwhelming, but understanding the rules and available tax strategies can help reduce stress. Whether it’s adjusting withholding, planning withdrawals, or utilizing tax-efficient practices, you have several options to manage your tax obligations effectively. Staying informed and proactive can help you stay on top of your tax responsibilities and enjoy your retirement years with greater peace of mind.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.