Denice R. Preston
You’ve saved for retirement using an individual pension account and 401(k). You know you’ll receive additional income through Social Security or a pension. What does all this mean for your tax bill after you leave the workplace?
A few factors largely determine the tax you will pay in retirement.
Your yearly tax bill can significantly impact how much you pay in daily expenses.
It is essential to know how your income from retirement will be taxed. This information will help you plan your future if you are still employed. If you have already retired, consider additional income sources to avoid running out of money. Understanding how taxes affect your retirement income will help you maximize and minimize your tax bill.
What is the Social Security tax rate in retirement?
You may not owe any taxes if Social Security is your only income source during retirement. Your income will not be taxed because it is too low. If you have income from other sources, such as otherwise tax-exempt or interest, then a portion of the Social Security benefit may be taxed.
Social Security benefits are taxed by more than half of beneficiaries. In 1984, the percentage of Social Security recipients who had to pay income tax on their benefits was less than 10%. By 2015, that number had increased to more than 50%. According to the Social Security Administration, this figure could rise to 56% by 2050.
Your combined income or the total of your:
You can get 50% off your Social Security Benefits for the Year.
The adjusted Gross Income is the total payment less any adjustments, like deductions or exclusions.
Interest income that is not taxed, for example, interest on municipal bonds.
Standard adjustments to gross earnings include contributions to health savings accounts, deductions from IRA contributions, and student loan interest deductions.
The amount of your taxed Social Security benefit depends on your total income. The chart below shows the percentage of Social Security benefits subject to tax based on your combined income.
How much income can a retiree receive without paying taxes?
You may receive distributions from 401(k)s and IRAs, Social Security benefits, pension payments, or annuity income. You can receive distributions from your 401(k), IRA, Social Security, pensions, and annuity. Even after retirement, some people earn money from employment, self-employment, or as an employee.
Unearned Income
Unearned income is subject to income taxes and may have different tax rules. The tax burden of a retired person depends on their tax bracket.
Depending on your annual income, you may have to pay taxes on distributions from a traditional IRA.
Taxable distributions are made from a retirement plan or another qualified account funded by contributions before taxes.
The income you receive from an employer-funded retirement plan is also taxed.
The tax treatment of distributions from plans that are funded by after-tax dollars is different than the taxation of those supported by pre-tax dollars. The Form 1099 R is sent to taxpayers who have made after-tax contributions. It reports the gross distribution as well as taxable amounts.
RMDs are required for beneficiaries of IRAs and 401(k), starting the Year that they reach 72 years old. In response to the pandemic in 2020, the RMD requirement has been suspended. However, it will be reinstated starting in 2021.
5 Rates of capital gains are applied to gains realized from the sale of an investment. Long-term capital gain tax rates are low, ranging from zero to 20%.
Distributions from Roth 401 (k) and Roth IRA are not taxable. The RMD is not required for Roth plans funded by after-tax dollars.
Earned Income
Earned income is taxed differently. While income earned from regular employment and self-employment will be subject to Social Security, Medicare, and income taxes, unearned income such as pensions, IRAs, or annuities are taxed according to rules that depend on the source of income. All income earned from regular employment or self-employment is subject to Social Security and Income Tax.
Your federal income tax liability is likely zero if your AGI equals or is less than the Standard Deduction applicable to your filing status.
Tax rates and liabilities for older individuals with earned or unearned income are determined by the tax bracket corresponding to their total taxable earnings. In retirement, you choose your tax bracket like when you worked. Add your taxable income sources, subtract any standard or itemized deducts, and apply any tax credits that you are eligible for. Check the tax tables on Form 1040 or 1040SR instructions.
Standard Retiree Deductions
The standard deduction for 2021 is $12,550 for single and married taxpayers filing separately. It is $25,100 for married taxpayers filing jointly. And it’s $18,800 if you are a head of household. Standard deductions for 2021 are $12,550 for individuals and married taxpayers who file separately $25100 for married taxpayers who file jointly, and $18,800 if you’re a head of household.
The standard deduction for taxpayers 65 and older, whether or not retired, is $1,700 in 2021 ($1,750 2022) if single or head of household (and are not married or have a surviving spouse), or $1,350 in 2021 ($1,400 2022) for each senior spouse if married filing jointly or separately, or qualified widow (er).
You won’t have to pay taxes if your total taxable income is below these limits. You are only required to file a return if you’re married and filing separately. However, you should do so anyway. You can claim credits such as the tax credit to the elderly or disabled and the earned income credit by filing a tax return.
Taxpayers who itemize their deductions cannot claim the standard deduction or bonus amounts. The average deduction amount has increased recently, so the threshold where older taxpayers are better off itemizing rather than taking the standard deduction is now higher. These higher levels could affect when you make charitable contributions or pay for other deductible expenses. You can benefit from itemizing in some years if you can group enormous itemizable costs in a tax year.
