Life changes
Retired This Year? How Your Tax Return Changes
The paycheck stops and the forms change. Retirement income comes from several places, each taxed its own way, and setting withholding is now your job instead of your employer’s.
Reviewed by LaToya Clark-Thompson, FounderLast updated
What changes on your return
In the year you retire you usually have a final W-2 plus your first retirement income. Pensions, annuities and withdrawals from a 401(k), 403(b) or traditional IRA arrive on Form 1099-R. Box 1 shows the gross distribution, Box 2a the taxable amount (when the payer knows it), Box 4 any federal tax withheld, and Box 7 a code that tells the IRS what kind of distribution it was. Roth distributions are often tax-free if the account and your age meet the rules, but they are still reported.
Filers age 65 or older get a larger standard deduction, and a new temporary federal deduction for seniors applies on top of that for those who qualify, phasing out at higher incomes. You do not have to itemize to claim it.
South Carolina and retirement income
South Carolina starts from your federal adjusted gross income, then lets retirees subtract a portion of qualifying retirement income, with a larger deduction once you reach the age set in the law. Military retirement income is exempt in South Carolina, and Social Security benefits are not taxed by the state. The SC return has its own lines for these, so the 1099-R details matter. Our retirement tax planning article has more background.
Withholding and required distributions
Nobody sets your withholding for you anymore. For pension and annuity payments, Form W-4P controls federal withholding; for IRA withdrawals and other non-periodic payments, Form W-4R does. Social Security has its own form (see starting Social Security). If withholding is too low, quarterly estimated payments fill the gap.
Required minimum distributions from traditional IRAs and most workplace plans begin at an age set by law, which Congress has raised more than once. Missing one brings an excise tax, though the penalty is reduced if the shortfall is corrected promptly. If you give to charity and are old enough, a qualified charitable distribution straight from an IRA can count toward the required amount without adding to taxable income.
What to bring and common mistakes
- Your final W-2 and any payout of unused leave
- Every Form 1099-R (pension, annuity, IRA, 401(k), rollovers)
- Form SSA-1099 if benefits started
- Form 1099-INT, 1099-DIV and 1099-B from bank and brokerage accounts
- Records of any after-tax contributions to a pension or IRA (Form 8606 if you filed one)
- Medicare premium and other medical records if you itemize
Mistakes we see: treating a direct rollover as taxable (or a cash-out as a rollover), missing the SC retirement deduction, no withholding on pension income, and paying tax twice on after-tax money in a pension because the taxable amount box was blank and nobody figured the tax-free part.
When a preparer is worth it
The first retirement year is worth professional eyes: a final W-2, several 1099-Rs, possibly a lump sum or rollover, and decisions about withholding and the order you draw from accounts. We prepare the return through our tax preparation service and can map out the next few years with tax planning, including when to take distributions. Our refund calculator gives a quick preview before your appointment.
Frequently asked questions
Is my pension taxable in South Carolina?
Pension income is generally taxable on your federal return and starts out in your South Carolina income, but SC allows a retirement income deduction that subtracts a portion of qualifying retirement income, with a larger amount at older ages. Military retirement income is exempt in SC. The exact deduction depends on your age and the type of income, so the SC return instructions are the authority.
How do I have taxes withheld from my pension or IRA?
Give the payer Form W-4P for regular pension or annuity payments, or Form W-4R for IRA withdrawals and other one-time or irregular payments. Many payers let you change withholding online. If your withholding still falls short, make quarterly estimated payments, especially if you also have investment income or Social Security that nothing is being withheld from.
What happens if I miss a required minimum distribution?
The IRS charges an excise tax on the amount you should have taken but did not. The tax is reduced if you correct the shortfall within the correction window, and the IRS can waive it for reasonable error if you take the distribution and explain on Form 5329. Take the missed amount as soon as you notice, then deal with the form when you file.
Is there a new tax deduction for seniors?
Yes. A temporary federal deduction is available to filers age 65 or older, in addition to the larger standard deduction older filers already get. It phases out as income rises, applies per qualifying person, and you can take it whether or not you itemize. A valid Social Security number is required. The current amount and income limits are on the IRS website.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You started Social Security
SSA-1099, how much is taxable, withholding with Form W-4V and SC’s exemption.
Learn moreYou had a military move
PCS moving costs, spouse residency, combat zone pay and SC’s military retirement exemption.
Learn moreYou received an inheritance
Inherited cash, IRAs, homes and estate K-1s. What is taxable and what is not.
Learn moreYou had big medical expenses
When medical bills are deductible, what counts, and how HSAs and insurance fit in.
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