A Surprise for Many Retired Senior Military Officers
If you’ve heard me speak, you’ve heard me say that your taxes are going to go way up when you retire. And…you retired last year and your refund was actually bigger than you expected. What gives? Am I really that far off base? No, this is the result of a unique quirk in the way Social Security taxes are withheld.
Military and Civilian Employer Withhold Too Much
If you’re a retired Colonel/Captain or higher you probably noticed that your pay went up in December. It really wasn’t a Christmas bonus. Social Security is only withheld on a portion of your base pay (and none at all on your retirement pay). For last year, that amount was $127,200 (It is $128,400 for 2018). If your total wages were more than $127,200 last year, and you retired last year you probably had too much Social Security tax withheld. Here is an example…
- You retired mid-year, last year and your total base pay was $69,000
- You were hired shortly after that into a $200,000 a year job and your pay from that job was $100,000
- Your total wages for the year was $169,000
- Both employers withheld Social Security taxes on all your wages for a total of $10,478
- The total withholding should have been $7,886
- You have $2,592 available for paying your income tax or refund
Ka-Ching! A refund
Next Year Won’t Be the Same
Assuming you stay in the same civilian job this year, you won’t have the same result. Your employer will stop withholding Social Security taxes when your wages hit the annual limit. And, if you decided I didn’t know what I was talking about when I said your taxes are going way up, you’re in for a nasty surprise.
Watch Out for This One Too
If your spouse is employed and earning wages (or has self-employment income) it is possible that you could exceed $250,000 in wages for the year and become subject to an additional 0.9% Medicare (ObamaCare) surtax. Depending on how the wages are distributed, your employer may not take any additional withholding for this tax that you will owe. Be ready for that. By the way, the tax still applies if you’re the only wage earner. It is just that your employer will start the additional withholding when your income reaches $200,000 (even though you need $250,000 in wages to be subject to the tax if you are married).
Taxes Will Surprise You After Retirement
I'm convinced that taxes are the single biggest financial related surprise for retired Senior Military Officers. You need to really pay attention to your tax situation or get someone to help you....they are your biggest lifetime expense