Unless a Massachusetts resident worked as an independent contractor, he or she probably received a paycheck that negated the need to worry about taxes but once a year. Now that the opportunity to retire has arisen, it is important to know that obligations to the IRS continue, but in a different way. How tax payments are made and how much is owed depends on whether funds come from a pension, Social Security benefits, a retirement account or a combination of the three.
If an individual receives over a certain amount in Social Security benefits each year, up to 85 percent of that amount could be subject to income taxes. Instead of making large quarterly or yearly tax payments, it is possible to have between 7 and 22 percent deducted from each payment for taxes. This may reduce the monthly amount received, but it will also help avoid large, periodic tax bills that could be a challenge to pay.
Massachusetts residents who receive pension payments may have taxes withheld as well. Retirement accounts can get a bit trickier, so it is important to understand the available options and the ramifications of each. Otherwise, an individual could simply make quarterly payments, but they need to be made on time in order to avoid incurring penalties and interest.
Making quarterly payments to the IRS may seem like gambling. If an individual fails to withhold enough, he or she would owe the next year. If he or she withholds too much, then a refund may be due, but it would limit funds during the remainder of the year. In order to make the best decision possible when it comes to accounting for income taxes during retirement, it may be a good idea to discuss the matter with an experienced tax law attorney.