Estimated Tax Payments in Retirement: What Retirees Need to Know to Avoid IRS Penalties
Many retirees assume that once they stop working and receiving a paycheck, tax season becomes simpler. After all, there’s no employer withholding taxes from each paycheck, no W-2 to review, and no need to think about payroll deductions.
Unfortunately, that assumption can lead to an unpleasant surprise.
One of the most overlooked tax issues in retirement is the requirement to make estimated tax payments throughout the year. Many retirees don’t discover this rule until they receive a penalty notice from the IRS.
If you receive income during retirement that isn’t subject to automatic tax withholding, the IRS may expect you to pay taxes quarterly rather than waiting until you file your tax return. Failing to do so can result in penalties and interest charges.
Let’s explore what estimated tax payments are, who needs to make them, and how retirees can avoid unnecessary IRS penalties.
What Are Estimated Tax Payments?
The U.S. tax system operates on a “pay-as-you-go” basis. This means the IRS generally expects taxpayers to pay taxes as income is earned throughout the year rather than paying everything at tax filing time.
For most working Americans, this happens automatically through payroll withholding. Every paycheck includes deductions that are sent directly to the IRS.
Retirement often changes that equation.
Once you stop receiving a paycheck, there may be no automatic withholding unless you specifically arrange for it. If you’re still generating taxable income from other sources, the IRS may require estimated tax payments to be made during the year.
These payments are typically made quarterly and are designed to ensure that taxpayers remain current on their tax obligations.
Why Retirees Often Miss This Requirement
Many retirees spend decades having taxes withheld automatically from their paychecks. As a result, they never have to think about sending tax payments directly to the government.
Then retirement arrives.
Suddenly, income may come from a variety of sources instead of a traditional employer. Because taxes are not automatically withheld in many situations, retirees can unknowingly fall behind on their tax obligations.
The issue isn’t that retirees are intentionally avoiding taxes. In many cases, they simply don’t realize that estimated payments may be required.
Unfortunately, the IRS generally expects taxpayers to understand the rules regardless of whether they were aware of them.
Common Retirement Income Sources That May Trigger Estimated Tax Payments
Not every retiree needs to make estimated payments. However, many retirees receive income from sources that can create this obligation.
- Capital gains from selling investments
- Rental property income
- Dividend income
- Interest income from bonds
- Business or self-employment income
- Side hustles and consulting work
- Income from selling collectibles or personal property
- Farm rental income
- Part-time employment without adequate withholding
A Retirement Example: Selling Investments
Imagine a retiree who decides to sell a portion of a taxable investment account.
Perhaps they’ve held a stock position for decades and decide to sell shares to help fund a grandchild’s college education, purchase a vehicle, or supplement retirement income.
Suppose the sale generates a $100,000 capital gain.
While the retiree understands that taxes will eventually be owed, they may assume they can simply pay the tax when they file their return the following April.
In many cases, that’s not how the IRS views it.
The IRS may expect a portion of the tax liability to be paid during the year through estimated tax payments. Waiting until tax filing season could result in an underpayment penalty.
Rental Properties Create Similar Challenges
Rental income is another common source of estimated tax issues.
Many retirees own investment properties or inherited farmland that generates annual income.
Unlike wages, rental payments generally don’t come with automatic tax withholding.
The result is that retirees can receive substantial income during the year while making no corresponding tax payments.
When tax season arrives, they may discover not only a tax bill but also a penalty for failing to make estimated payments.
Side Hustles Don’t Get a Pass
Retirement doesn’t necessarily mean stopping work completely.
Many retirees enjoy consulting, freelancing, crafting, online sales, hobby businesses, or other part-time ventures.
While these activities can be rewarding financially and personally, they can also create tax complications.
If income is earned without withholding, retirees may need to account for both income taxes and estimated payment requirements.
What Happens If You Don’t Pay Estimated Taxes?
The IRS may assess what is commonly referred to as an underpayment penalty.
This occurs when taxpayers fail to pay enough tax throughout the year through withholding and estimated payments.
In addition to the penalty itself, interest may be charged on the unpaid amount.
The exact amount depends on factors such as how much tax was underpaid, how long the tax remained unpaid, current IRS interest rates, and your overall tax situation.
The Safe Harbor Rules Retirees Should Understand
Fortunately, the tax code includes provisions known as safe harbor rules.
These rules often provide protection from underpayment penalties even if your income increases unexpectedly.
Generally speaking, taxpayers can avoid penalties if they satisfy certain payment thresholds during the year.
One commonly used safe harbor allows taxpayers to avoid penalties if they pay at least 100% of the prior year’s total tax liability.
Higher-income taxpayers may need to satisfy a 110% threshold instead.
There is also a safe harbor based on paying at least 90% of the current year’s tax liability.
Can Social Security and IRA Withholding Help?
In many cases, yes.
Retirees often have the option to withhold taxes directly from certain income sources, including traditional IRA distributions, 401(k) withdrawals, pension payments, and Social Security benefits.
Strategically increasing withholding from these sources can sometimes eliminate the need for separate quarterly estimated tax payments.
This is one reason tax planning is so important in retirement.
Retirement Tax Planning Is More Important Than Ever
Many retirees focus heavily on investment returns while paying less attention to tax management.
Yet taxes can have a significant impact on retirement income.
Proper tax planning may help retirees avoid IRS penalties, improve cash flow management, reduce surprise tax bills, coordinate withdrawals efficiently, and create more predictable retirement income.
What Should You Do If You Receive an IRS Penalty Notice?
First, don’t panic.
Receiving a notice doesn’t automatically mean the penalty is permanent.
In certain situations, taxpayers may be eligible for penalty relief or reduction.
The IRS sometimes considers factors such as recent retirement, disability, reasonable cause, unexpected circumstances, and good-faith efforts to comply.
Every situation is unique, so it’s important to discuss the notice with a qualified tax professional before assuming nothing can be done.
Communication Is Critical
One of the biggest causes of estimated tax problems is simply a lack of communication.
Retirees often make financial decisions during the year without realizing the tax consequences.
Selling investments, receiving rental income, starting a side business, or liquidating assets can all affect tax obligations.
The earlier these events are discussed with financial and tax professionals, the more opportunities exist to address potential issues before penalties arise.
Key Takeaways
Estimated tax payments may not be the most exciting part of retirement planning, but they can be an important component of a successful retirement strategy.
If you receive income that isn’t subject to automatic withholding, it’s worth evaluating whether quarterly tax payments are necessary.
Many retirees are surprised to learn that the IRS expects taxes to be paid throughout the year, even after employment ends.
The good news is that awareness and planning can often prevent costly penalties.
Frequently Asked Questions About Estimated Tax Payments in Retirement
Do retirees have to make estimated tax payments?
Not all retirees do. However, retirees who receive taxable income without sufficient withholding may be required to make quarterly estimated tax payments.
What types of retirement income may require estimated tax payments?
Capital gains, rental income, dividends, bond interest, consulting income, side businesses, and other taxable income sources may trigger estimated payment requirements.
What happens if I don’t make estimated tax payments?
You may owe an underpayment penalty and interest charges in addition to the taxes due.
Can taxes be withheld from Social Security benefits?
Yes. Many retirees choose to withhold taxes from Social Security benefits to help satisfy tax obligations throughout the year.
Can taxes be withheld from IRA distributions?
Yes. Traditional IRA withdrawals often allow withholding, which can help reduce the need for separate quarterly payments.
What is the estimated tax safe harbor rule?
Safe harbor provisions generally protect taxpayers from penalties if they pay a specified percentage of either the current year’s tax liability or the prior year’s tax liability.
How often are estimated tax payments due?
Estimated tax payments are generally due quarterly throughout the year according to IRS deadlines.
Should I talk to a financial advisor or CPA about estimated taxes?
Yes. Coordinating tax planning with both your financial advisor and tax professional can help reduce surprises and improve retirement tax efficiency.
Daniel Wendol
Item #1
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today we’re going to be talking about making estimated tax payments in retirement what are estimated tax payments why do I have to worry about this and is this real yes did you know that if you make over ,000 do after your dedu after your credits and such the government the IRS expects you to pay estimated taxes throughout the year you might be saying I don’t do that am I going to get in trouble the answer is yes you will let me bring on my co-host speaking of trouble Tony sure welcome to the show we’re talking taxes
00:00:40
did you know that you’re supposed to make estimated tax payments did you know this you know I’d heard something about that uh but not really I thought that you just paid every April and that was it but there’s I have a catchphrase for you uh there’s always time for trouble that’s my new tax phrase or my new not tax that’s my new catchphrase there’s always time for trouble well I have a catchphrase yeah which I’m going to show you wait why are you wearing a t-shirt
00:01:11
first of all on the show today oh tax taxation is theft taxation is theft that’s my new T-shirt oh my gosh I am wearing because we are talking taxes today and fun yeah and I not a huge fan of tax taxes no even though my mom used to work for the IRS what is your tax plan you know what the tax plan is for retirees watching this show because this is retirement Focus right they are subject to estimated taxes and they don’t realize it normally you pay through your paycheck right your taxes are withheld from your
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W2 and then at the end of the year or at the beginning of the year you run your numbers and then you April comes around right so all sounds familiar and you say how much do I owe how much is my refund that’s it no problems but what if you don’t have a paycheck what if you don’t get a W2 anymore you’re retired you’re not putting into social security I mean into the IRS throughout the year and the IRS doesn’t like that did you know that you will be penalized and pay a fine penalty but doesn’t the IRS collect
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taxes every year they collect it throughout the year here’s a quote from the IRS quote taxes are pay as you go this means that you need to pay most of your tax during the year as you receive income rather than paying at the end of the year sure it’s that’s how why it’s taken out of your paycheck so that’s why most people don’t care about that all right so what if you don’t have a paycheck or you know um Let me let me give you some examples some common so you’re uh
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oversights for retirement consultant or you’re self-employed or you get you get cash influx not from an employer who’s taking out taxes Bingo what if you get rent what if you own a rental property sure if you sell what if you sell records throughout the year what if you sell records that’s technically a cap show yeah right theoretically is that a collect that’s a separate tax rate but regardless it’s a capital game right um a lot of people in retirement get dividends from stocks or they get
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Bond payments coupons from their bond Holdings right or they so all right Tony let’s talk this through you’re a retiree now imagine you are a retiree and you on the side are selling records which you have plenty of them so this this this could happen now you’re getting Social Security now let’s say you’re on Social Security yeah but you’re selling records and you’re selling them in a decent clip and you’re selling off a piece of Farmland too and let’s say you
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you let’s say January 2025 you sell a couple acres of farm that you own yeah and you make $30,000 on it yep did you pay tax on that see this is what happens people do capital gains they sell uh a stock not in an IRA now if you take an IRA distribution people like oh I just withhold taxes on it and that’s what most people do and IRA distributions you’re allowed to do it at the end of the year doesn’t have to be throughout if you doesn’t right but if you sell a capital gain or you’re selling records
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or something I’m G to sell off a bunch of stock and take that money and use it to buy send my grandkid to college or buy a car for them or something right what if you did that because you’re not you’re not getting a paycheck anymore so you’re not getting that c you know the payments going in every paycheck to the IRS which they love but you you’re just selling here and there technically you’re supposed to identify the gain calculate the taxes due and send a quarterly estimated payment to the IRS
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MH you’re supposed to do that if you’re getting Bond payments not from an IRA because Ira you can withhold taxes but right outside of an IRA you’re supposed to be paying and you’re supposed to pay them online you go on the IRS and you pay them or you call up your account and say I’m supposed to be making ctly payments estimated tax payments they say yeah you should be but what the problem is most retirees don’t know this they don’t think about it until they get the IRS penalty
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until they get this boom it’s called the underpayment of estimate estimated tax by individuals penalty I’ll repeat that the underpayment of estimated tax by individuals penalty the utip u utip y u tip utip um not good that penalty includes late payments by the way so if you were supposed to make a payment in in you know um early part of the year and you didn’t then they make interest what is the payment what is the what is the with the penalty depends on how much you’re supposed to pay and the
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pen and the late it’s a percentage right yeah so this isn’t Fun and this happens oh yeah all the time I bet because think about it you work your whole life at W2 then you retire it’s like I’m supposed to be making quart quarterly payment like I’ve never made a payment to the IRS until April I’ve always paid my taxes I’m a good citizen no you have to continue to pay as you make money and if you don’t you get penalized right absolutely nuts and people just don’t realize this pay as
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you go right pay as you go so back to this idea of well uh you know I sold a building my I sold my second home and I have 100,000 thousand of capital gains well how do I withhold taxes there can I tell the well who do I tell how do I what do I do right like or I sold $100,000 of stock to help bail my um bail my son out of jail right terrible so it’s a double whammy if it was an IRA you your boy been acting up Dan or seriously I’m on the edge I’m on the edge Tony taxation is theft I’m ready I’m ready
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sign me up Ron Paul um so if you made a big capital gain and you use those proceeds because you’ve been holding this stock since you were in your 30s and now you’re 65 you’re done working you take a 100,000 of capital gains you pay your 15% capital gains tax great you could actually pay no capital gains tax if you play your cards right we’ve done a show on that there’s way around you can get 0% tax rate on capital gains um but you’re like okay I’m I owe 15% on 100,000
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15,000 what do I do like can I tell the custodian that sold the stock to withhold tax they’re not going to do it if it was Ira they would before they cut you to check but no so it’s on you it’s on you have to do this it happened Stony and I wanted to let people know this exists so that they could start thinking about it yeah and I don’t like when retirees you know because that happens to me they come to me and they get caught unaware yeah that’s what that’s the they come to you after the fact
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saying what happened right and that’s tough they get the letter they get the tax penalty letter they’re like what is this and the IRS usually hasn’t really been enforcing this over the years but lately I’ve seen more enforcement talking to the accountants I work with they’re telling me more and more people are being this is like they’re coming down on this and the issue that I see mostly is retirees have no clue that this is even a rule they’ve never had to pay quarterly taxes so now
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they’re like really now you can withhold taxes from your social security check you can withhold taxes from your IRA distributions so that usually was what people do it’s the people that don’t that have outside income outside their Ira sure which more and more people do right with stocks and Investments and if they own property or renting out or if they have a side hustle side hustle a lot of people do crafts or something in retirement and they go to all these shows and I do record shows on this
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weekends you know I sell buy and sell records so right so now you buy and sell records and so you’ve been making money but you’re not paying quality taxes the reason why to I know you’re not right I could just tell you’re just like now you’re starting to say like oh my God am I gonna get a letter from the IRS no because you’ve been withholding tax payments from your check yes at work and your wife and that is covering everything so plus I’m not making enough making not much you don’t need to
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make much it’s a thousand bucks um there’s a safe harbor rule the Safe Harbor rule for this it that’s exactly what it’s called safe rule for estimated taxes you pay if you pay at least 90% of the tax you owe for the current year or 100% of the tax you owed for the previous year then you don’t have to worry about it so a lot of times people are withholding from their social security check or they’re withholding from their pay their paycheck they’re paying 100% of the tax from the previous
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year so if they make a ton more so people who are employed or have especially who have jobs they’re paying in out of each paycheck but you’re talking about people in retirement after they’re leave employ they’re not employed by an employer who’s taking out tax those are the people that need to be concerned if they have other sources of income right and so let’s imagine Tony that you all of a sudden start really sell like you land a big money on your records like it wasn’t
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unexpected you just you hit the hit the jackpot and you made $50,000 selling records and all of a sudden you’re like I didn’t pay quarterly tax on that as long as you paid 100% of the tax you made the previous year 110% if you and your wife make over 150 adjusted gross you’re fine they’re not going they’ll make you pay the tax you’re still have to pay but they won’t penalize you for not paying quarterly because it was um you’ve already met the Safe Harbor rule so that’s what a lot of
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people do especially self-employed people is they just pay a 100 or 110% of what they paid last year and they’re fine and then they don’t they eliminate that penalty um now you might be watching us saying yeah I know all about it because I got a penalty yeah you can remove it reduce it or dispute it with the IRS here’s a quote from the IRS quote you and your spouse if you file joint return retired in the past two years after reaching age 62 or become disabled and you had a reasonable cause they’ll allow
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you to dis that’s going to apply to a lot of people I mean if you or your spouse uh if you file a joint return uh if you’ve retired in the past two years and you’re 62 or older um then yeah they they’ll let you but you still need a reasonable cause yeah and in the past ignorance has been enough right but now you’re watching this show you’re no longer ignorant you know now you’re supposed to be paying quarterly and what will happen why did you tell us we could have used this as
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as an excuse now we can’t you and your taxation is theft no one likes to get the letter no one likes to get the payment like penalty and you know so um I’m trying to bring awareness to taxation is that because taxation you know we want to eliminate these taxes it would be great if we can eliminate taxes altogether but the idea is to eliminate the surprise so and then what happens all right oh please I didn’t know I just retired and I didn’t know I had to do quarterly and I didn’t blah blah blah
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okay the IRS says fine we’ll let it go this time but that doesn’t mean you don’t have to start paying Quality Tax now you know so now you have to start paying quity tax and people don’t like that because they’re like what do I do I just send a check to the IRS yeah you do there’s forms you fill it out you send a check with the form or most likely you call up your account and say hey hey knucklehead why didn’t you tell me I had to pay quarterly taxes and the accountants are like oh yeah I
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forgot you know I’m sorry I didn’t know you would do in side hustle sound records would why you let me know why don’t we communicate again lack of communication with your financial advisors your accountants leads to drama so hopefully you’re watching this and you’re saying oh good to know another level of confusion unlocked thanks Dan yeah that’s it Tony so that’s the idea is understand that you do need to make estimated tax payments even if you’re
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retired it applies to when you can’t automatically withhold taxes like capital gains or Bond dividends coupons it happens to people now you know and knowings have to battle y so are you going to start paying quarterly taxes Tony what are you going to start paying quarterly taxes on those records no because I’m paying tax on the cash you do it on the cash avoid tax all together is that what you just said no on record that’s not what I said either I take credit card and venmo so it’s there’s
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records yeah there there’s a record of my record sales I should say well hopefully this will help at least one person out spread the word yeah spread the word that you want to pay quot taxes and just don’t get hit with this penalty because it’s not fun like who wants a penalty from the government it’s bad enough that you have to pay the tax yeah my dad is in a situation and he did get the letter I should use him as an example because he rents out farmland and he’s retired so
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he gets checks once a year for rent uh but he’s not having any taxes withheld anywhere so the government keeps uh the IRS keeps sending him hey we we want some money from you he’s gota yeah as you earn it so he owes he owes back taxes I’m trying to get him back in shape with the IRS but it’s not easy because he inherited this farmland and now he has to pay taxes on it so you’ll probably get around the penalty by saying uh we just inherited and we didn’t know and blah blah blah but now going forward
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he’s got to make quarterly tax payments yeah and his tax um preparer has like coupons that he like bills that he pays it’s a little slip it’s p paper you just throw it in and you do it and you can automate it you can do it online so the government’s getting better at figuring out ways to make it easy for you to pay yeah they’re May they’re getting better at taking your money or making sure they get all of your money so do you want me to send your dad a shirt taxation is theft do he
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would probably enjoy it yeah at this point all right well Tony again oh you know what I’m gonna do I’m G to end this show uh having my son uh John come on because he he’s got something that I gotta see if I can find it it’s been a while I haven’t had him come on and I’ll talk about the taxes you’re not a CPA yeah I’m not a CPA you’re Dolphin Financial Group does not provide tax advice see a cpa for tax advice there you go got to say that when dealing with taxes y but call me email
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put show notes uh comments in the show if you have questions or if you’ve Fallen victim to this help others spread the word we don’t want people to have to pay a penalty for something that they just didn’t know they had to do right that’s the lesson yep thanks for a good show Tony we’ll see everyone next week taxation is theft all matters discussed in today’s show are for informational purposes only this show is not investment advice Dan Wendol nor Dolphin Financial Group are affiliated or endorsed by any government
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agency investment advisory services are offered through Dolphin Wealth Management Inc a registered investment advisor in the State of Florida Insurance products and services are offered through Dolphin Insurance Inc dolphin Wealth Management Inc and dolphin Insurance Inc are affiliated companies doing businesses as dolphin Financial Group you should talk to someone at Dolphin Financial Group before implementing any of these strategies or ideas