Avoid an Unwelcome Surprise on Your Tax Return

I remember vividly doing a tax return for a new client that had recently retired from Union Pacific (without first working with us on a tax plan).

He proudly exclaimed that in retirement he would obviously owe less in taxes, and much of his retirement would be exempt from state taxation. Both of these assertions were correct.

However, when I finished his tax return, I had to break the news to him that he owed thousands more to the IRS.

Ouch, how could that be? I walked him through the details, which showed that indeed he owed less tax in retirement than when he was working. However, his withholding from his retirement checks (Harriman Pension, Tier I, and Tier II) were dismal compared to his highly taxed W-2.

Here is the pickle he found himself in – his budget had already grown accustomed to an artificially high net paycheck, and now he had to live on less. In addition, he had a large tax debt to pay off.

I don’t like surprises and neither should you. That’s why I will carefully develop a plan for you that eliminates unwelcome surprises.

When a computer calculates the withholding for the Harriman pension, it tries to do a complete job. However, the withholding software simply cannot know how much the Tier I and Tier II payments are, how much your spouse’s job pays, what your spousal pension benefits are, and what your investment income is.

Likewise, the Railroad Retirement Board withholding software for Tier I and Tier II simply doesn’t know about your Harriman Pension or all the factors that will be on your final tax return.

These are all independent systems, and without knowledge of all of them you simply can’t project your true tax bracket. The only way to get an accurate answer is to sit down and do the calculations. As a CPA, I’m adept at this task.

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