Is Retirement Income Taxable? What Retirees Owe the IRS

You retired last year and started receiving Social Security and making withdrawals from your IRA. Now, you're looking at a 1099-R and wondering how much the IRS will take. Here's the main point: some of your retirement income is taxable, and some is not.

Social Security is taxed only if your other income goes above a certain level. Withdrawals from a traditional 401(k) or IRA are fully taxable, while qualified Roth withdrawals are not taxed at all. Organize your income by category, and you'll know your tax bill before filing.

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 tax year 2025 (filing in 2026), these thresholds have increased compared to tax year 2024. 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. Visit the IRS site for the annual inflation adjustment.

If you're an unmarried individual who's 65 or older, for the 2024 tax year, you only need to file a tax return if your gross income exceeded $16,550.

If you're married and you file jointly for the 2024 tax year, you only have to file a return if your combined gross income exceeded $32,300 (both spouses 65 or older). Since these filing rules are geared toward retirees, keep in mind that the income thresholds for joint returns change if your spouse is under 65.

Before deciding to skip filing, take a moment to check Chapter 1 of the IRS Tax Guide for Seniors to find the current-year thresholds based on your filing status and age. Even if your income level doesn't necessitate filing a tax return, it might still be beneficial to do so. Here are a few situations where filing could work to your advantage:

1. 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.
2. You're eligible to get an Earned Income Tax Credit (EITC), which you can only claim if you file a return.
3. You're eligible to claim either the American Opportunity Credit or the Lifetime Learning Credit for costs related to higher education.

Filing Thresholds at Age 65

Your filing requirement is based on three factors: your filing status, age, and gross income for use in preparing 2025 returns.

Which 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 reach the age of 65, you are more likely to start receiving funds from various sources, which may include pensions, Social Security, investments, and more. The good news is that not all of these sources are taxable. Here's a brief overview of some common sources of income for seniors and how they may be taxed for retirees.

Social Security Income

After retiring, most seniors begin collecting Social Security income. If this constitutes your sole source of income, it generally isn't taxable. If you get 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 your benefits is taxable. However, if you have a large pension, for example, you may have to pay taxes on a larger percentage of your Social Security benefits.

Whether your Social Security is taxable comes down to a figure the IRS calls your base amount, you'll also see it called provisional income. To find it, take half your Social Security benefits and add all your other income, including tax-exempt interest like municipal bond interest.

Don't start from your adjusted gross income here. AGI already includes the taxable part of your benefits, so using it would count them twice and overstate your total.

If that figure exceeds $25,000 (single, head of household) 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.

The worksheet in the Form 1040 instructions does the math for you, and E-file.com runs it automatically when you enter your SSA-1099.

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 income and your tax bracket for the year. Qualified Roth IRAs have 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.

Pensions and Annuity Distributions

If your annuity sits inside an IRA, the distributions are taxed exactly like any other IRA withdrawal. If you purchased an after-tax annuity outside a retirement account, you'll owe tax on the interest or earnings. The portion representing your original contribution comes back tax-free.

Whether your pension is taxable depends on one question: Did you pay for any of it? If your employer paid the entire cost and nothing came from your paycheck, then every dollar you receive is taxable. This applies to most traditional pensions. If you put in after-tax money, part of each payment is tax-free because it's your own money, and the rest is taxable. The tax-free amount is determined when your payments start and stays the same each year, even if the total payment changes.

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, which may include the 1099-INT, 1099-DIV, 1099-B, 1099-R, or SSA-1099, 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 for Seniors

For 2024, taxpayers 65 and older receive an additional standard deduction of $1,950 (single filers) or $1,550 per qualifying spouse (married filing jointly).

For 2025, the standard deduction increases to $15,750 for single filers and $31,500 for married filing jointly, with additional amounts for those 65 and older.

Military Retirement Pay

Military Retirement pay can be calculated based on the recipient's age or the total length of their service in the workforce. This type of compensation is considered taxable income and must be reported on your tax return as a pension on lines 5a and 5b of Form 1040.

However, there are exceptions to this rule. Certain military and government disability pensions may fall outside the realm of taxable income. If so, veterans or retired government employees receiving these specific pensions do not need to report them as taxable income.

Make Smart Tax Deductions

If you do file a tax return, pay attention to deduction opportunities. These can significantly lower your tax burden and help you make the most out of a fixed income. Keep in mind that after you retire, the deductions that you claim may differ from the ones you qualified for in previous years. Some of the most helpful deductions for retirees include the following:

Medical and Dental Expenses

As you age, medical and dental costs can become one of your largest expenses. You can lessen the burden on your wallet by deducting applicable expenses, such as insurance premiums, prescription drugs, and out-of-pocket health care costs. View our medical deduction guideline to see the deduction floor and limits.

Retirement Plan Contributions

Once you retire, contributions toward your retirement plan may slow, but they don't have to stop at 70.5 as they once did. The age restriction for contributions to a traditional IRA has been eliminated. If you contribute toward an IRA, don't forget to deduct them from your tax return.
Note: To contribute, you need taxable income. This does not include money from pensions, Social Security, IRA and 401(k) withdrawals, annuity payments, and investment returns.

Business Expenses

Whether you're working as a consultant for a long-time employer or you start a new small business, you can deduct most business expenses. These may include technology, office rental fees, and even business travel.

Tax Planning Strategies for Retirement

Diversify Your Income Sources: Consider drawing from both taxable and tax-free accounts to manage your overall tax bracket. This strategy can help keep your taxable income lower while meeting your financial needs.

Roth Conversion Strategies: Converting traditional IRA funds to a Roth IRA 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 once retired? Learn more by reading our post about how retirement affects your tax return. 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.

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.

Quiz: Retirement and Taxes