Like your shadows under the sun, taxes are unavoidable. They are like the air we all breathe every day. So, what exactly are taxes? According to Investopedia, “taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional or national.”
One of the most common taxes is the value-added tax, or VAT for short. VATs are repeatedly imposed on products during every point of sale at which the value is then added. Notice when you buy a piece of steak at a steakhouse on the receipt, there’s a VAT that you could find right after, or before, the subtotal? That there is the tax collected by the Government through your purchase.
Depending on your status in society, the percentage of taxes would differ. If you weren’t married or did not qualify for other filing statuses, your taxes would be less compared to those that are.
Why are Taxes Collected?
You just got your paycheck for the first time, and you noticed that there had been a deduction in your pay. You got confused and mad, wondering why your salary was cut short. That, my friend, is what we call an income tax.
The Government collects taxes to help fund the construction of various public works and services, such as the construction of roads and bridges. The Government can use taxes collected from the people to maintain said public works and services as well. Basically, the tax collected by the Government is to be used for the betterment of the livelihood of the people of that particular country.
How do Taxes work on Pension?
Before going into whether or not pensions have taxes, let us first discuss what pensions are. A pension plan is an employee benefit that allows the employer to regularly contribute to a pool of money to be set aside in order to fund future payments made to eligible employees once they have retired.
According to Section 32 of the Tax Code, pensions are non-taxable income given to employees after they retire, provided that upon reaching the age of 60 but not reaching more than 65 and has served for five years, the Government will exempt said pensioners from taxes on their pensions.
Oftentimes, retirees who receive pensions from their former employers need to include the entire amount they had received as taxable income during their tax returns for the year in which they had received their pensions. According to the rules of the IRS, if you had not contributed at all to your employer’s pension plan, your entire pension would then be fully taxable. Another case of taxable pensions would be when you have already received non-taxable amounts during the past years.
Why should you withhold a sufficient amount of taxes from your pensions?
If you’ve withheld enough money or have paid enough in estimated tax payments already, the Internal Revenue Service (IRS) would not subject you to any penalties for not being able to pay the sufficient amount of taxes required for the year. Another way is to pay for at least 90% of your total tax liability as calculated at the end of the year during your current-year tax returns. If you have completely paid for the taxes you owed last year, you usually wouldn’t owe any penalties.
Many people wish they had a pension since it is a vital source of retirement income. It’s a good idea to work out a financial plan that covers how much you’ll spend and compensates for your tax burden as you approach retirement age. You should work on setting aside a lot of money for taxes the first year you start claiming pension funds so you don’t run out of money when it’s time to file.