Here’s everything you need to figure it out
Reviewed by Khadija KhartitFact checked by Suzanne KvilhaugReviewed by Khadija KhartitFact checked by Suzanne Kvilhaug
Your tax liability during retirement comes down to a few important factors: your filing status, your retirement income sources, and your total annual income. Your tax bill will affect how much money you have to pay for your day-to-day expenses after you retire.
It’s important to understand how your retirement income will be taxed. You may have to account for additional sources of income so you don’t run out of money.
Key Takeaways
- Up to 85% of your Social Security benefits may be taxable depending on your total income and your filing status.
- Distributions from 401(k) and traditional IRA accounts are generally taxable.
- Distributions from Roth IRAs can be tax-free.
- You’re responsible for Social Security and Medicare taxes if you’re employed or self-employed even when you receive Social Security benefits.
- The federal tax code and some state laws provide special benefits for retirees and older taxpayers.
How Is Social Security Taxed in Retirement?
There’s a good chance that you won’t owe taxes on Social Security if it’s the only source of income you receive during retirement because your income will be too low to be taxable. A portion of your Social Security benefits may incur a tax bill, however, if you have other sources of income including otherwise tax-exempt interest income.
More than half of Social Security beneficiaries pay some tax on their benefits. The percentage of families receiving Social Security benefits who have to pay income taxes on them was less than 10% in 1984 and more than 50% by 2015. This figure may rise to 56% between 2015 and 2050, according to the Social Security Administration (SSA).
The amount of your taxable Social Security benefits depends on your combined income of:
- 50% of your Social Security benefits for the year
- Your adjusted gross income (AGI) which is your total income minus adjustments to that income such as deductions and exclusions
- Tax-exempt interest income, such as interest received on municipal bonds
Common sources of gross income include wages, salaries, tips, interest, dividends, IRA/401(k) distributions, pensions, and annuities. Common adjustments to gross income include health savings account (HSA) contributions, deductions for IRA contributions, student loan interest deductions, and contributions to self-employed retirement plans.
The level of your combined income determines the taxable portion of your Social Security benefits. This chart shows the percentage of your Social Security benefits that will be subject to tax at different levels of combined income:
Combined Income | Taxable Portion of Social Security |
Individual Return | |
$0 to $24,999 | No tax |
$25,000 to $34,000 | Up to 50% of SS may be taxable |
More than $34,000 | Up to 85% of SS may be taxable |
Married, Joint Return | |
$0 to $31,999 | No tax |
$32,000 to $44,000 | Up to 50% of SS may be taxable |
More than $44,000 | Up to 85% of SS may be taxable |
Married, Separate Return | |
$0 and up | Up to 85% of SS may be taxable |
How Much Income Can a Retiree Receive Without Paying Taxes?
How much income you can receive depends on several factors including the sources of income and the total amount you receive. You may get distributions from 401(k)s and IRAs, Social Security benefits, pension payments, and annuity income. Some people may also continue to earn income from work as an employee or through self-employment, even though they may have retired from their regular or long-term employment.
Unearned Income
Unearned income may be subject to income tax and different tax rules. A retiree’s tax liability depends on the tax bracket into which they fall:
- Distributions from a traditional IRA for which you claimed tax deductions for your contributions may be taxable depending on your total annual income.
- Distributions from a 401(k) plan or other qualified retirement account funded with before-tax contributions are taxable.
Both your income from these retirement plans and your earned income are taxed as ordinary income at rates from 10% to 37%. Any income from an employer-funded pension plan is also taxable.
Distributions from plans funded using after-tax contributions aren’t taxed the same way as those funded with pretax dollars. Form 1099-R is sent to a taxpayer who made after-tax contributions to plans, reporting both the gross amount distributed as well as the taxable amount.
IRAs, 401(k)s, and similar plans are required to make annual required minimum distributions (RMDs) to beneficiaries beginning the year they reach age 72 or age 73 if they reach age 72 after Dec. 31, 2022.
Income such as dividends, rents, and taxable interest from investments held outside IRAs, 401(k)s, and similar plans are subject to tax at ordinary income rates of up to 37%.
Capital gains rates apply to gains realized on the sale of investments. Long-term capital gains are taxed at low rates ranging from a zero rate bracket up to 20% for taxpayers with very high taxable incomes.
Important
Roth IRA and Roth 401(k) distributions aren’t taxable. Roth plans that are funded with after-tax dollars don’t have an RMD requirement.
Earned Income
Unearned income such as that from pensions, IRAs, annuities, and other investments is subject to income tax under rules that vary by the income’s source but earned income works a little differently. Any income you earn from regular employment and self-employment sources is subject to Social Security, Medicare, and income taxes.
You’ll have to pay Social Security and Medicare taxes on that earned income if you receive Social Security benefits and continue to work and earn. You won’t owe federal income tax on it, however, if the sum of your earned income, unearned income, and Social Security benefit remains low enough. Your federal income tax liability likely is zero if your AGI is equal to or less than the standard deduction for your filing status.
The tax rates and tax liabilities for older people with earned and unearned income depend on the tax bracket that corresponds to their total taxable income. You can determine your tax bracket in retirement the same way you did while you were working. Add up all your sources of taxable income, subtract your standard or itemized deductions, apply any tax credits you’re eligible for, and check the tax tables in the instructions for Form 1040 and 1040 SR.
You can also put all this information into a tax software program or give it to your accountant.
Standard Deductions for Retirees
The standard deductions for tax year 2024 are used on tax returns filed in 2025. The standard deductions for 2024 are $14,600 for single taxpayers and married taxpayers filing separately, $29,200 for married taxpayers filing jointly, and $21,900 for heads of household.
Taxpayers who are 65 years of age or older are eligible for an extra standard deduction of $1,950 for 2024 if they’re single or heads of household who aren’t married or surviving spouses regardless of whether they’re retired. Those who are married filing jointly, married filing separately, or qualifying surviving spouses are eligible for an extra $1,550 in tax year 2024 per individual.
Filing Status | Standard Deduction | Senior Bonus | Total Deduction |
Single | $14,600 | $1,950 | $16,550 |
Married filing jointly or qualifying surviving spouse | $29,200 | $1,550 | $30,750 |
Married filing separately | $14,600 | $1,550 | $16,150 |
Head of household | $21,900 | $1,950 | $23,850 |
You won’t owe any taxes if your taxable total income falls below these amounts. You usually won’t even have to file a tax return unless you are married filing separately although you may want to do so anyway. Filing a return allows you to claim any credits for which you might be eligible such as the tax credit for the elderly and disabled or the earned income credit. Filing a return also ensures that you receive any refund you may be owed.
Taxpayers who itemize deductions aren’t permitted to claim the standard deduction and bonus amounts. Annual increases in the standard deduction amounts raise the threshold at which older taxpayers benefit more from itemizing than claiming the standard deduction. You may be able to benefit from itemizing in some years, however, if you can lump large itemizable expenses together so they fall within a single tax year.
Tax Brackets for 2024 and 2025
Tax rates and brackets are based on filing status and income thresholds. These brackets apply to the 2024 and 2025 tax years. The 2025 brackets apply to the return you’ll file in 2026.
2025 Rate | Married Joint Return | Single Individual | Head of Household | Married Separate Return |
10% | $23,850 or less | $11,925 or less | $17,000 or less | $11,925 or less |
12% | $23,851 to $96,950 | $11,926 to $48,475 | $17,001 to $64,850 | $11,926 to $48,475 |
22% | $96,951 to $206,700 | $48,476 to $103,350 | $64,851 to $103,350 | $48,476 to $103,350 |
24% | $206,701 to $394,600 | $103,351 to $197,300 | $103,351 to $197,300 | $103,351 to $197,300 |
32% | $394,601 to $501,050 | $197,301 to $250,525 | $197,301 to $250,500 | $197,301 to $250,525 |
35% | $501,051 to $751,600 | $250,526 to $626,350 | $250,501 to $636,350 | $250,526 to $375,800 |
37% | Over $751,600 | Over $626,350 | Over $626,350 | Over $375,800 |
The marginal tax rates for 2024 were the same but the level of taxable income that applies to each rate has increased. The top rate of 37% applied to income over $609,350 for individuals and heads of households and $731,200 for married couples who filed jointly.
2024 Rate | Married Joint Return | Single Individual | Head of Household | Married Separate Return |
10% | $23,200 or less | $11,600 or less | $16,550 or less | $11,600 or less |
12% | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 | $11,601 to $47,150 |
22% | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 | $47,151 to $100,525 |
24% | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 | $100,526 to $191,950 |
32% | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 | $191,951 to $243,725 |
35% | $487,451 to $731,200 | $243,726 to $609,350 | $243,701 to $609,350 | $243,726 to $365,600 |
37% | Over $731,200 | Over $609,350 | Over $609,350 | Over $365,600 |
What Is Unearned Income?
Unearned income is any that you didn’t have to work to receive. Considering and placing investments isn’t considered work in a tax sense. Work involves performing a service for either an employer or for yourself if you’re self-employed and receiving payment for it. This is referred to as earned income. Unearned income includes sources such as interest and dividends from investments.
Is All My Income Subject to Social Security Taxes?
There’s a limit to how much of your income you must pay Social Security tax on but many people don’t reach it. It’s referred to as maximum taxable earnings or the wage base and it’s $176,100 in 2025, up from $168,600 in 2024.
What’s the Difference Between a Tax Credit and a Tax Deduction?
Both credits and deductions can reduce your tax bill but they do it in different ways. Deductions are subtracted from your income so you’re only taxed on the balance. Credits subtract from the tax you owe. You might owe $6,000 but you would only owe $4,700 if you can claim a $1,300 credit.
A few credits are refundable. Maybe you owe only $1,000 in taxes and that $1,300 tax credit you claim is refundable. The IRS or other tax authority will send you $300 to account for the difference after the first $1,000 erased your tax bill.
The Bottom Line
Will you pay taxes in retirement? You probably will unless your taxable income falls at or below the standard deduction level each year. Retirees can minimize their tax burdens in many ways, however. Strategies include timing distributions, bunching income, bunching deductions that can be itemized, and doing retirement account conversions.
Read the original article on Investopedia.