Do I Need to Pay Taxes on My Retirement Income?

When retiring, you can expect several changes to your tax return. If you're retiring from working, you'll no longer have to pay income taxes on wages from employment. However, you'll still owe taxes on other forms of income, such as pension income or proceeds from retirement accounts.

If you continue working after retirement, you must still pay Social Security and Medicare taxes on your earnings, regardless of age or benefit eligibility. There are narrow exceptions to paying Social Security taxes that apply at any age, such as for those who qualify for a religious exemption.

Know When You Have to File a Tax Return

Many retirees should continue to file an annual tax return with the Internal Revenue Service (IRS), but not all are required to do this. Typically, your annual income level determines whether you need to file a tax return.

For the 2024 tax year, single filers 65 or older must file if their gross income exceeded $16,550. Married couples filing jointly (both 65 or older) must file if their combined gross income exceeded $32,300. These filing thresholds change if your spouse is under 65.

For tax year 2025 (filing in 2026), these thresholds will increase: single filers 65 or older will need to file if gross income exceeds $17,000, and married couples filing jointly (both 65 or older) will need to file if income exceeds $33,200. Additional information can be found on the IRS website, here.

In addition, even if your income level doesn't require you to file a tax return, you may want to do so anyway. You stand to benefit from filing if any of the following situations apply:

• Your former employer withheld federal income tax on your behalf at any time during the year, or you made estimated payments in anticipation of owing federal taxes.
• You're eligible to claim an Earned Income Tax Credit (EITC), which you can only claim if you file a return.
• You're eligible to claim either the American Opportunity Credit or the Lifetime Learning Credit for costs related to higher education.

People 65 and older may choose to use Form 1040-SR, U.S. Income Tax Return for Seniors, which features larger print and a standard deduction chart. This form is optional and provides the same tax results as Form 1040.

The IRS offers Tax Counseling for the Elderly (TCE), which provides free tax return preparation to qualified individuals.

Understand What Retirement Income Is Taxable

Understanding how different sources of retirement income are taxed can help you plan more effectively for your tax obligations.

Once you turn 65, there's an increased chance you'll begin receiving funds from a number of different sources, which could include pensions, Social Security, investments, and more. The good news is that only some of these sources are taxable. Here is a quick look at some of the most common sources of funds for seniors and how they may be taxed for retirees.

Social Security Income
After retiring, most seniors begin collecting Social Security benefits. If this constitutes your sole source of income, then it isn't taxable. If you receive Social Security and a mix of other types of income, however, then it may be taxable. As a general rule, retirees have to consider up to 85% of Social Security as taxable income. If your additional income is relatively small, then only a small percentage of it is taxable, but if you have a large pension, for example, you may have to pay taxes on a bigger percentage of your Social Security.

The taxability of Social Security benefits depends on your "provisional income," which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. If your provisional income exceeds $25,000 (single) or $32,000 (married filing jointly), up to 50% of benefits may be taxable. If it exceeds $34,000 (single) or $44,000 (married filing jointly), up to 85% may be taxable.

You can request voluntary federal tax withholding from your Social Security benefits to avoid owing taxes at year-end. Sign in to or create a personal my Social Security account to start, change, or stop your withholding request online.

Retirement Account Withdrawals
For most retirement accounts, you pay taxes when you withdraw funds. That means you'll need to report withdrawals from Individual Retirement Accounts (IRAs), 401(k)s, and most other types of retirement plans. The amount you'll owe in taxes depends on your gross income and your tax bracket for the year. Roth IRAs are the main exceptions here since contributions are initially made with after-tax dollars and withdrawals are made tax-free.

Required minimum distributions (RMDs) begin at age 73 for most retirement accounts (except Roth IRAs). If you fail to take your required distributions, you may face a penalty of 25% of the amount you should have withdrawn.

Annuity Distributions
If your annuity is linked with an IRA, your distributions are taxable in the same way that retirement account withdrawals are. If you purchased an after-tax annuity, you'll typically owe taxes on the interest or earnings of the annuity.

Investment Income
You'll owe taxes on investment income after retirement just as you did before you turned 65. The 1099 form from your financial institution reflects your earnings from investments, dividends, and capital gains.

Long-term capital gains (from investments held more than one year) are taxed at preferential rates of 0%, 15%, or 20%, depending on your income level. Qualified dividends receive the same favorable tax treatment as long-term capital gains.

Standard Deduction and Tax Strategies

Retirees should pay attention to deduction opportunities that can significantly lower tax burdens and help maximize fixed incomes. After retirement, the deductions claimed may differ from those qualified for in previous years. Some of the most helpful deductions for retirees include:

• Medical and Dental Expenses: Medical and dental costs often increase with age. You can deduct applicable expenses, such as insurance premiums, prescription drugs, and out-of-pocket health care costs, subject to certain limitations. See more on the medical deduction guidelines.
• Investment Expenses: Many retirees pursue investments as a means of generating extra income. You can deduct related expenses for accounting fees, financial planner fees, and investment-related costs.
• Retirement Plan Contributions: If you have earned income, you can continue contributing to an IRA regardless of age. These contributions may be tax-deductible depending on your income and whether you or your spouse are covered by a workplace retirement plan.
• Business Expenses: Whether you're working as a consultant or starting a small business, you can deduct most business expenses. These may include technology, office rental fees, and business-related travel.

Tax planning strategies can help manage your overall tax bracket. Consider drawing from both taxable and tax-free accounts strategically. Roth conversion strategies during lower-income years can reduce future tax obligations, though you'll pay taxes on the converted amount in the year of conversion.

Still have questions about your taxes in retirement? You can find more answers here. Also, if you are filing your taxes with E-file.com you can ask your question to one of our qualified tax support specialists. We are here to make the filing process easy, fast and as painless as possible.

Frequently Asked Questions

Do I have to pay taxes on all my retirement income?
No, not all retirement income is taxable. Social Security may not be taxable if it's your only income, and Roth IRA withdrawals are tax-free. However, traditional 401(k) and IRA withdrawals are generally fully taxable.

At what age do I stop paying taxes on retirement income?
There's no age at which you automatically stop paying taxes on retirement income. As long as your income exceeds the filing thresholds, you'll need to file and potentially pay taxes regardless of age.

Can I still contribute to retirement accounts after I retire?
Yes, you can contribute to IRAs as long as you have earned income, regardless of age. However, you must begin taking required minimum distributions from traditional retirement accounts starting at age 73.

How can I reduce taxes on my retirement income?
Consider strategies like managing your withdrawal amounts, diversifying between taxable and tax-free accounts, timing Social Security benefits, and taking advantage of the higher standard deduction for seniors.