Last spring, a church elder stopped me after the service and handed me her phone. She said that after filing her taxes, the IRS indicated she owed more money.

She was genuinely shocked, having only ever received refunds while working. It was her first year after retiring and starting to receive her pension and Social Security.

As we went through her documents, the reason turned out to be surprisingly simple. She had rushed through the pension withholding setup when she retired.

When you work, your employer automatically withholds taxes based on your W-4. But the moment you retire, that system ends, and each payment source starts withholding taxes separately.

Pension withholding is determined using Form W-4P. According to IRS guidelines, if you don't submit this form, the payer will assume you are single and with no adjustments.

Here's where the trap lies. The payer has no knowledge of your other income, so they calculate as if this pension is your only source of income.

The elder wasn't having any taxes withheld from her Social Security. Unless you apply separately, there is no federal tax withholding on Social Security.

When applying, you use Form W-4V, but you can only choose from four withholding rates: 7%, 10%, 12%, or 22%. According to the SSA, you cannot withhold a fixed dollar amount.

Not all of Social Security is taxable either. For singles, if your combined income exceeds $25,000, or $32,000 for married couples filing jointly, part of it becomes taxable.

Combined income is your adjusted gross income plus tax-exempt interest and half of your Social Security benefits. Those with a decent pension can easily exceed this threshold.

So, with the pension being withheld as if she were single and no withholding from Social Security, it created a gap at year-end. Honestly, I think this is more about the system being unfriendly than a personal mistake.

Fortunately, the senior deduction has increased significantly this year. The standard deduction for singles in 2026 is $16,100.

For singles aged 65 and older, an additional $2,050 is added. This is a portion received without income limits.

Additionally, from 2025 to 2028, there will be a temporary senior deduction of $6,000 per person aged 65 and older. However, it starts to phase out if the modified adjusted gross income exceeds $75,000 for singles or $150,000 for couples.

Just because the deductions have increased doesn't mean it's all good. Deductions are calculated based on the total for the year when filing, and the amounts withheld monthly can vary.

Also, if you owe more than $1,000 in taxes, you may incur an underpayment penalty. This was the part the elder found most frustrating.

The criteria to avoid penalties are to have withheld at least 90% of this year's tax or 100% of last year's tax through withholding or estimated payments. If last year's adjusted gross income exceeded $150,000, the threshold increases to 110%.

There's a small loophole for retirees. If you retired after age 62 in the current year or the previous year and have a valid reason, you can request a penalty waiver using Form 2210.

If you live in California, you also need to consider state taxes. California withholds state income tax from pensions by default, and to change it, you need to use Form DE 4P.

On the other hand, California does not impose state income tax on Social Security. So, you only need to manage the withholding settings for your pension.

So, what should you do in your first year of retirement? I would suggest filling out a new W-4P before your first pension payment.

The W-4P has a section for reporting other income. If you include your spouse's pension or expected Social Security amount here, the payer will withhold more accurately.

You can also apply for withholding on Social Security through the SSA website or by phone. You might start with 10% or 12% and adjust at year-end.

The IRS website has a Tax Withholding Estimator that allows you to input retirement income. Running it once a year, around fall, can make next April much easier.

If you feel you're already falling short this year, you can make estimated tax payments for the fourth quarter. The deadline for the last estimated tax payment for 2026 is January 15, 2027.

Of course, the answers can vary significantly depending on the type of pension, couple's income, and whether you're withdrawing from an IRA. It's essential to check with a tax professional or CPA based on your individual situation.

In the end, the elder submitted her W-4P again and applied for 10% withholding on her Social Security. She mentioned that even though the amount coming into her account each month has decreased a bit, she feels more at ease now.

When preparing for retirement, many focus solely on how much they've saved, but it's equally important to consider how much is being withheld each month. If your parents are retiring this year, I recommend reviewing a pension statement together this weekend.