Estimated Taxes

Understanding taxes has been one of my biggest challenges since transitioning back to the civilian world after a career in the military. It’s been five years, and I am still learning! Like many servicemembers, I remained blissfully ignorant about federal income taxes while on active duty. Now with a civilian job, military retirement income, and a side hustle or two, taxes seem to be an ever present, in your face type of thing.

Make no mistake, this is a good problem to have. I am thankful for the opportunities I’ve experienced and am prepared to provide my fair share back in taxes. Determining the fair share is the problem. I’ve blogged previously how I’ve came in low on federal income taxes the past two years resulting in a hefty end of year tax bill with associated penalties. I am also a little concerned I may be drawing attention to myself!

I believe my struggles come down to two things. First, with all the new sources of income in post military life, Adjusted Gross Income and corresponding tax bracket goes up. Again, not a bad problem to have. Where it gets tricky though is the W4 one files with an employer, or through DFAS for military retirement. The W4 is specifically for that particular earned income source and corresponding tax bracket. Bottom line, no matter how much you tinker with claiming number of dependents on a W4, there most likely won’t be enough withholding to cover your total tax bill at the end of the year when other sources of income are factored into your AGI. Of course, one can elect for extra tax withholding using the W4, but that too can be tricky to calculate.   

Second, taxes are supposed to be paid in the quarter in which the income was earned. That’s why even though one may settle up their tax bill in April during filing season, the IRS will tack on penalties. You paid the tax bill late! Many military retirees side hustles may include passive income such as real estate, writing or other investments. Sometimes it’s near impossible to determine how much passive income one will have in a given quarter!

This is where “estimated taxes” comes in. I never heard this expression until I was nearly 50! One can try to actually estimate how much tax they will owe for that particular quarter or use my preferred method, a sort of dollar cost averaging…but for taxes. If you pay a fixed amount in estimated taxes every quarter, your actual tax bill may be slightly higher or lower, but as long as you are paid up you should be good!  

I started paying estimated taxes last year and learned I still wasn’t paying enough. This year I’ve bumped up my quarterly estimated tax payments, so I’ll hopefully be on target. To make it convenient for you, the IRS has a surprisingly easy to navigate web site that makes quarterly payments a breeze. I just paid my second quarter estimated taxes a few days ago. Second quarter estimated taxes were due on the 17^th of June by the way!

I’d venture to say most retiring military folks should plan on making quarterly estimated tax payments. I came to this realization a little too late. While I am not into overpaying taxes and giving the government an interest free loan, I certainly don’t recommend paying a hefty bill with penalties at the end of the year and drawing attention to yourself as I’ve done the past few years.

Of course, there is the option to just hand your finances over to an accountant. But that is added expense and plus, what fun would that be? While I haven’t gotten it right yet, I’ve gotten a little better each of the five tax years since retiring. Maybe this is the year I’ll be spot on!

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