So for the last probably six years my wife and I who file jointly have been getting REALLY good tax refunds. I have looked at it as a little Christmas gift. Last year we used the money to pay to fix our foundation. My wife worked for the state for over 20 years and left her state agency in 2000. She is 55 and I am 53 and in 2024 she became eligible to begin receiving her state pension while she now works a good private sector job. I still work for the state and have 9 years until I can pull a full pension.

I have known of tax brackets but never REALLY knew about them and I wish I did. In 2024 she only got one month of her pension and in 2025 got a full year on top of both our salaries. When doing taxes today in TurboTax, I was happy to see the little number at the top showing what you get back or owe saying we had a good return as usual when I had only entered our W-2s. Then I enter her 1099-R for her pension and WHAM, into the negative we go.

With her pension we went into a new tax bracket and owed another $21K in taxes, despite tax deductions on payments, because we were now being taxed at a higher rate. I also invested in CDs and the interest was taxed high.

So now I owe money and will do what I can to reduce our taxable income to get out of that tax bracket! The way I see is for her to contribute the maximum she can annually to her job’s 401K, which she didn’t participate in as they have a different retirement plan but a 401K is available. I contribute to a pension and 401K, but will now increase my 401k contributions. Hopefully between us we can get out of this tax bracket and at least go back to getting some kind of return or not have to pay. Plus the extra money in the 401Ks will grow faster than a savings or CD.

I wish I knew this when her pension started as I would have done this then. Why can’t there just be a set tax rate everyone pays regardless of income for the most part?

I am sure the vast majority in here knew this before I learned it today, but if anyone is still working and about to get a pension or thinking of pulling money out of a 401K to put into a Roth IRA if you don’t need it right away, pay attention that you don’t go into that next tax bracket.

The whole tax prep thing is way beyond me. I pay an enrolled agent professional preparer to do mine and its worth every dime. I too think a flat tax is long overdue.

That's not how tax brackets work... Only the portion of your income that falls into the next bracket is taxed at that higher percentage. It doesn't make you pay extra tax on all your other income too.

Do you have her pension payments correctly set up to withhold income tax like you would on a paycheck? If not, you're having to pay all the income tax on that pension yourself on the back end.

That must be a hell of a pension. 21k additional in taxes

quote:

Originally posted by RogueJSK:
That's not how tax brackets work. Only the portion of your income that falls into the next bracket is taxed at that higher percentage. It doesn't make you pay extra tax on all the other income too.

Yes, I now understand the tax brackets and you pay the tax for the money on that bracket and then money in the next bracket, but we had never breached into the 32% bracket before and now when you suddenly have $90K being taxed in the 32% bracket instead of the 24% bracket, that makes a major difference. That is what happened.

quote:

Originally posted by RogueJSK:
Do you have her pension payments correctly set up to withhold income tax like you would on a paycheck? If not, you're having to pay all the income tax on that pension yourself on the back end.

Obviously I will also look into having them withhold more income tax from the payments as I also don’t think it was enough.

quote:

Originally posted by old rugged cross:
That must be a hell of a pension. 21k additional in taxes

It is.

Yeah, sounds like you haven't been withholding any income taxes from her pension, hence the big tax bill come tax season.

Same as if you don't withhold any income tax from your paycheck. You get hit with a big income tax bill the next spring.

You should get her with pension program and file a W-4, just like do with your paycheck. You'll need to follow the instructions to calculate the correct withholding rate, since you have 3 incomes.

quote:

Originally posted by RogueJSK:
Sounds like you're not withholding any income taxes from her pension, hence the big tax bill come tax season.

Need to get her with pension program and file a W4, just like do with your paycheck. You'll need to follow the instructions to calculate the correct withholding rate, since you have 3 incomes.

Incomes taxes were withheld, but as you say I do not think it was enough and we will fix that ASAP along with contributing to 401Ks more. Like I said, HUGE learning lesson for me.

Stormin - for at least this year, I'd recommend getting a professional (Enrolled Agent or CPA) to go over everything to make sure it's all correct, and give additional mitigating recommendations for future years.

quote:

Originally posted by marksman41:
Stormin - for at least this year, I'd recommend getting a professional (Enrolled Agent or CPA) to go over everything to make sure it's all correct.

Definitely thinking of doing this. I have a 401K with Fidelity that has a large chunk of change in it and is professionally managed by them from when I used to work in the private sector. In the past they have been willing to give advice beyond the scope of the 401K so first I think I will meet with them to see what advice they will give and go from there.

Or are you speaking more about someone reviewing the tax return for this year instead of me using TurboTax? If it is to go over this year’s tax return, who do you use and how do you find a good one? All I hear is HR Block or whatever and seems like picking a CPA is like picking a lawyer. I have just always done my own taxes and never had something like this until now.

ETA: I just did a quick search on how to find a good one and will start searching.

After having a big tax bill a number of years ago, I built an Excel spreadsheet (with several worksheets) using TurboTax as a model to project my federal and state income taxes. It's been within +/- one or two dollars every year once I put in the final information (to validate the model), which I attribute to rounding differences. It allows me to balance withholding and quarterly tax payments as the tax year progresses.

We ended up filing Schedule A for TY2025 due to the SALT increase, so I had to develop two more worksheets earlier this year. One does have to keep it updated monthly with interest and dividends, among other taxable events.

My opinion only, but I'd much rather have to write a check each year to the IRS rather than get a refund. Sounds like you didn't adjust your withholding for the new income stream, which isn't all that unusual I wouldn't think, considering the entire tax withholding system is a scheme to keep us from realizing exactly how much we pay in taxes every year. So long as you had enough withheld this year to cover your tax liability from last year, you probably won't owe a penalty. Even if you do owe a penalty, you can always request a waiver for the penalty.

I have had multiple income streams for many years between my wife and I and my military retirement, so its always been a bit of a balancing act to get the correct amount of withholding to not have too much withheld and not have to pay a penalty for not withholding enough. So far I've been pretty good at keeping it close and having to write a check each year, but I have missed by a fair amount a couple of times. This year, big refund because I retired for good and lost 50% of my income. I have actually increased my withholding from my military retirement to cover some withdrawals from my 401K later in the year in order to reduce my eventual RMD in about 9 years.

Definitely need to actively manage your retirement funds, either on your own or with a manager. But in the end, I'd much rather write a check in April than get a refund in March.

When she withdrew from her pension, didn’t they keep certain percentage for tax purpose each time? I guess not. That’s why you were blindsided with that big tax burden.

quote:

Originally posted by 12131:
When she withdrew from her pension, didn’t they keep certain percentage for tax purpose each time? I guess not. That’s why you were blindsided with that big tax burden.

It is setup for federal taxes to be withdrawn on her monthly payment we will get for the rest of our lives. I just don’t think the right amount was setup, but still the bigger factor is us going into a 32% tax bracket. I am going to increase the tax withdrawal from the distribution and work to decrease our taxable income.

Thanks.

Stormin, I could be wrong but, I’m not quite sure you understood what RogueJSK explained about the higher tax bracket. I didn’t even know it until I read his post.

If your income pushes you into a higher bracket, only the amount of income over the cap on the the lower bracket is taxed at the higher rate. You still pay the lower rate up until the ceiling of the lower bracket. I always thought I paid the higher rate across the board.

Thanks Rogue.

You should have a cpa. If you do, might want to think about getting a new one
Or at least talk with them other than just have them prepare your taxes.

quote:

Originally posted by 400m:
Stormin, I could be wrong but, I’m not quite sure you understood what RogueJSK explained about the higher tax bracket. I didn’t even know it until I read his post.

If your income pushes you into a higher bracket, only the amount of income over the cap on the the lower bracket is taxed at the higher rate. You still pay the lower rate up until the ceiling of the lower bracket. I always thought I paid the higher rate across the board.

Thanks Rogue.

I absolutely understand what Rouge explained about the higher tax bracket and I too did not understand before today when I did research and Rouge confirmed it. My problem that I now learned was that my wife’s pension and interest from CD investments put us with $90K being taxed in the 32% tax bracket that we have NEVER been in before. That is a big increase and that was the reason for the tax increase. So I went from a set of income being taxed at a maximum of 24% and then added more to the 24% and then $90K into the 34% tax bracket. That is also why I want to do what I can to reduce my taxable earnings by putting more money into a 401K and 457. I would have done this as soon as she started getting her pension if I knew this could happen so I am just trying to help others out with awareness. I will get it figured out for the years ahead.

Ouch! Sorry man, that’s a tough pill to swallow. At least you’ll be in a better position next year.

quote:

Originally posted by 400m:
Ouch! Sorry man, that’s a tough pill to swallow. At least you’ll be in a better position next year.

Thanks and yes, I really hope so.