If Congress doesn’t extend the Trump Tax Cuts (TCJA) for individual taxpayers, federal retirees and pre-retirees will likely be paying higher taxes starting on January 1, 2026. Without strategically planning ahead for higher taxes, Uncle Sam may take a bigger bite out of your retirement income than you realize.
Not Planning For Higher Individual Tax Rates
When federal tax rates revert to the higher brackets set prior to 2018, you’ll be paying roughly 1% to 4% more in personal taxes. Add to this, everything from the Standard Deduction to the Child Tax Credit will be affected. Since federal retirees pay income taxes on their FERS annuity (pension), Social Security, and withdrawals from their traditional Thrift Savings Plan (TSP), it’s important to plan ahead for income taxes when you’re close to retirement.
Not Adjusting Your Tax Withholdings In Retirement
When you get a huge tax return it’s not a windfall. It usually means you need to adjust your withholding. The same holds true if you end up owing taxes when you file your return. Once you retire, tax withholding is significantly different than when you were working. You have to make sure it covers all of your taxable income including your FERS pension, traditional TSP distributions and Social Security. Depending on where you live, your federal retirement income may also be subject to state taxes.
“If you and your spouse have retirement plans from private-sector employment, it’s up to you to get it right when RMDs kick in.”
Misunderstanding Required Minimum Distributions (RMDS)
For federal retirees, RMDs from your traditional TSP are relatively straightforward. The TSP calculates what you owe and helps you avoid IRS penalties by sending your RMD on time. If you and your spouse have retirement plans from private-sector employment, it’s up to you to get it right when RMDs kick in. For married couples, Defined Contribution Plans like the TSP and 401(k)s are always owned individually. Under IRS rules, you must calculate your RMDs separately and withdraw the required amount from each retirement account.
Not Taking Itemized Deductions For Out-Of-Pocket Expenses
Under the Trump Tax Cuts, the standard deduction nearly doubled for individuals and families. As a result, some experts estimate that 90% of taxpayers choose to claim the standard deduction. However, once the Trump Tax Cuts expire, itemizing deductions may make more sense if your allowable deductions are greater than a lower standard deduction. This is especially important if you end up paying out-of-pocket for long term care and other medical expenses that aren’t cover by insurance.
Touch base with an FRC® trained advisor who can connect you with a highly-experienced tax professional who understands your federal benefits.
