What to do when military pension creates tax liability due to withholding issues
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Dear Tax Talk,
I am employed full time and I also collect a military pension for retirement. I have both set at “single 2” for taxes and this year I saw my tax liability jump up $2,000 when adding in my pension. I checked with Defense Finance and Accounting Services, or DFAS, and the max at “single 0” is $50 per monthly pay period, which is not enough to cover the tax liability — but I changed it anyway. My taxes this year are acting as if I had 2 jobs. My adjusted gross income, or AGI, was less than last year, too. Not sure I understand what is going on.
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You are correct, the tax liability is calculated based on both your full-time job and your military pension, and you have already figured out that it has to do with the amount of taxes that you are having withheld from both of these sources of income.
It’s time to take a look at IRS Form W-4P, Withholding Certificate for Pension and Annuity Payments, as this is where you are going to find the answer to your dilemma of not having enough withheld in taxes. There are 3 different worksheets and you need to complete at least 2 of them. The first one is the “Personal Allowance Worksheet” where you will see that Item G directs you to the “Deduction and Adjustments Worksheet” if you plan to itemize your deductions or claim adjustments to income. Item G also directs you to the “Multiple Pensions/More-Than-One-Income Worksheet,” which applies to your situation.
Not getting a military pension?
If you are working and getting a pension from a public or private employer, you may find yourself owing more tax, too. You also can use IRS Form W-4P to adjust your tax withholding.
The IRS tells you in the instructions to figure all of the allowances that you can claim on one worksheet by combining income subject to withholding from all sources. Additionally, make sure that you do not claim the same allowances more than once, which means your Form W-4 that you give to your employer should not include allowances already included on Form W-4P. Once you determine how many allowances you are entitled to claim, they should be claimed on the highest source of income for the withholding to be more accurate. You should claim 0 allowances on the lower source of income.
One final note to keep in mind: If you are submitting these forms during the middle of the year, you need to factor in that the amount of taxes to be withheld may need to be further adjusted for any shortfall from the first part of the year.
Thank you for all of your years of service to our country and all the best to you.
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