My Early Retirement Tax Strategy has always been to manage my retirement income to pay the lowest possible tax rate and never get a tax refund. My Starve the Tax Monster-2 tax strategy manages restricted tax withholding. This year I will push the amount I’ll owe to just under the IRS penalty threshold. I’m starving the tax monster until it’s dinner time, the income tax deadline mid April.

My Retirement Tax Strategy, Reloaded to Withhold The Least Possible

I just can’t allow myself to ever overfeed the tax monster just to wait for it to regurgitate the excess to me once it gets around to it. I’ve always felt that using the federal government as an interest free savings account isn’t financially smart. But this year my motivation and strategy is amplified and more of a mini personal protest. Not only will I make sure I won’t overpay for a refund, I am pushing the amount I will owe to the limit. The plan is to write a last minute larger check to settle my taxes.

Last year I posted my 2016 Starve the Tax Monster early retirement income tax plan when I found that I over withheld federal taxes on my IRA distributions. I took advantage of my withholding mistake and painlessly increased my Roth holdings and made tax withholding changes for the next year.

This year it’s all about my disgust with the fraud, incompetence, and the waste running amok. I can’t change or control much in any of this nonsense that’s going on. But I can control how I pay my owed taxes for the year. I might as well earn some interest on my delayed tax payment money too.

They Finally Got My Goat

There a couple of things that pushed me toward this retirement tax strategy.

First the Equifax hack.

I established a credit freeze at all three credit reporting agencies to help stop fraudulent loans against us. But I can’t stop a fraudulent income tax filing against my and/or my wife’s Social Security numbers. The IRS says to file early for your refund before any fraudsters do. Any fraudulent tax returns against a Social Security number will result in the legit taxpayers experiencing huge delays in their refunds. Forget that. I will just send my check in by the filing deadline. If the IRS paid out a fraudulent refund in error to some jack-wad then they can work that out on their own time and money.

Second, I’m somewhat annoyed about all the White House travel spending waste.

From Cabinet members private and chartered plane issues to the VP Pence football game political stunt. Not to mention the cost of all the President’s weekends away from Washington spent golfing at his properties. They always do what they are going to do. But I don’t have to like it or go out of my way support it.  

Lastly, I think the proposed tax reform clearly favors the rich and corporations and frankly it stinks.

Even though it is far from law, it shows their intent and priorities. As far as I am concerned they are simply tossing peanuts to the middle class and the poor.

Legally Starving the Tax Monster

As I wrote in last year’s starve the tax monster post,

“I use the term monster because it will happily over eat without squabble but will hunt you down and destroy you if you don’t feed it what it thinks you owe. I have to pay the tax monster something to keep it off my back but not more than I have to pay. It’s better that I manage my money than trust the monster with it.”

Obviously not paying taxes will get you in big trouble with the tax monster. Fines and interest are added to your tax obligation as penalty. Go too far and prison is also a possibility. There are also interests and penalties for underpaying your taxes. My retirement tax strategy walks the line without crossing the underpayment penalty rules. The rules state you can avoid underpayment penalty if after completing your income taxes you:

• Owe less than $1,000,

Or if you owe more than $1000, the lower of-

• Paid at least 90% of the tax you owe for the current tax filing year through withholding or quarterly estimated payments.
• Or your tax withholding/payments are equal to 100% of your previous year’s tax obligation.

Figuring Out The Year’s Tax Withheld vs. Estimated Obligation

It’s late enough in the year to make a good estimate of this year’s taxable income. I run that estimated 2017 amount through the 2016 tax software I used. This gives me my approximate 2017 tax obligation. By looking at what tax has been withheld and scheduled to be withheld I came up with my probable 2017 tax filing result. I simply had a lot of room to increase my underpayment amount before the year ends.

My 2017 Retirement Tax Strategy

My retirement tax strategy adjustment for this year is to stop my IRA federal withholding for November and December. I will come in owing just below the $1000 penalty threshold. Stopping the last 2 months of tax withholding will increase the amount they will have to wait for. I will file my taxes and send a check by the April 15th tax filing deadline.

Delaying payment of up to $999 to settle my taxes isn’t much, but it is about 30% of my yearly tax obligation. Frugal living and managing income for low taxes has it’s benefits.

I simply keep invested and save the money that I didn’t withhold as taxes. In the whole scheme of things financial, the amount doesn’t add up to much, but some interest/dividends is better than nothing. Mostly I just get satisfaction delaying the monster’s feasting and overeating my money right away.

My 2018 Retirement Tax Strategy

My SEPP 72t ends this year and I will be giving myself a raise for 2018, making my taxable retirement income higher next year. I also ran that increased amount through the tax software to estimate my 2018 tax obligation.

Based on my tax software test results I will restart a 10% federal tax withholding from my 2018 retirement income in July.

Note: I do this stop and start withholding because my IRA fund holder only allows for federal tax withholding of at least 10% from distributed funds. If they could do it I could easily set the withholding rate at 5% year-round. That would also accomplish the same starve the monster retirement tax strategy.

Next October I can run the numbers again to see if my 2018 income and tax calculations are still valid for owing either just under $1000 in taxes, or having withheld 100% of this year’s lower retirement income tax obligation. Based on the results I can make necessary tax withholding adjustments.

Words of Caution

The IRS expects that we pay as we go. You can’t pay your taxes on the last month or two for the year or they could penalize you for underpayment for the first 3 quarters of the year.

The way this retirement tax strategy works for me is I get a 1099R that says the amount of federal taxes withheld for the year. I don’t believe the IRS will go through the trouble to verify it was evenly paid throughout the year if I come in below the underpayment penalty thresholds.

If I was paying quarterly estimated taxes I would instead pay a reduced amount of estimated taxes each quarter. I’d calculate an amount to result in the same end of year underpayment below the penalty threshold.

This retirement tax strategy only delays what I am obligated to pay. It in no way reduces or eliminates my income tax. However, I do reduce my tax obligation by using a tax efficient retirement withdrawal strategy.

Lastly

Starving the tax monster is only a minor financial win if I save the money and it earns interest or dividends. But I am looking at what I call my mini-protest bonus: The huge personal satisfaction I get knowing I am starving the tax monster for as much and for as long as possible.

The big take away:

• Don’t use the Federal Government as an interest free savings account- Never Purposely over withhold for tax refunds.
• Know the income tax underpayment penalty thresholds and stay below them.
• Have the discipline to save/invest your money and pay your tax obligation before the income tax filing deadline.

CYA Disclaimer:

I write this article for entertainment and informational use only. In no way should this article be considered professional tax or financial advice on how anyone should handle their income taxes. Do your own research and seek professional help before setting out on your own tax plan. If you freely decide to follow my retirement tax strategy then you do so at your own risk.