Living in retirement should be as stress-free as possible. Having ample retirement savings and social security income can help to set you up well for this. One thing that you will need to consider when planning for retirement is taxes. Will you need to pay income taxes on your income in retirement? That will depend on the source and the amount of that income.
You could end up paying no taxes at all and not even needing to file a return. In other situations, you might need to pay some taxes, but it may be less than you would’ve paid on regular income before retirement. Here are some of the different situations you might find yourself in during retirement, and the various taxes or exemptions that affect them.
1. Situations Where You Don’t Need to File
If your gross income exceeds the standard deduction plus a standard exemption amount, you will need to pay taxes, even if you are living on Social Security benefits. However, your Social Security income is not counted by the IRS as gross income. Therefore, if you are living off of social security income entirely, you will not need to file income taxes.
2. Sometimes You May Need to File
As of the tax year 2018, if you are not married and are age 65 or older, you will need to file income tax if your gross income exceeds $13,600 or more. Keep in mind the above exemption for Social Security income, which means that this income is separate from your Social Security income.
Each year, you will need to determine if your income above Social Security exceeds that $13,600 standard deduction number, and that will tell you whether you need to file for the year.
Prior to the 2018 tax year, the amounts would be based on the year’s standard deduction amount plus the exemption amount for your age and filing status. Today, however, these calculations no longer account for an exemption, but rather rely on a single larger standard deduction instead. This is because the tax law passed in late 2017 changed the amounts of standard deductions and the way taxes are filed for many people.
If you are married filing jointly and have a spouse who is also age 65 or older, you will need to file an income tax return if your combined gross annual income meets or exceeds $26,600. If your spouse is under 65, then that amount drops down to $25,300. These numbers apply only to the years 2018 and later and will most likely increase slightly each tax year.
3. The Amount You Pay on Taxable Social Security Income Varies
If you are married filing separately, file separate tax returns, and live with your spouse at any point during the year, your Social Security benefits will count as gross income. This could require you to file a tax return if the total amount of your Social Security income exceeds the standard deduction for your age and filing status. The amount of your Social Security benefits you would be taxed on varies depending on how you file.
- Fifty percent of your Social Security income is taxable if you are filing as an individual with a combined gross income (Social Security plus other taxable income sources) between $25,000 and $35,000.
- Eighty-five percent of your Social Security income is taxable if you are filing as an individual and your combined gross income is more than $34,000.
- Fifty percent of your Social Security income is taxable if you are married filing jointly, and your combined gross income is between $32,000 and $44,000.
- Eighty-five percent of your Social Security income is taxable if you are married filing jointly, and your combined gross taxable income is over $44,000.
4. There are Tax Credits for Retirees
If you end up in one of the above situations where you do need to file a tax return, you might be able to reduce the amount of your tax burden if you are eligible for a tax credit. If you are age 65 or older and your income from non-Social Security sources is low, you can claim the tax credit for the elderly or disabled. This tax credit is, of course, only available if you do owe taxes to the IRS for that tax year.
We know that the tax laws governing retirement income for seniors can be incredibly complex and even overwhelming. Hopefully, with this information, you can feel better equipped to face retirement with confidence, knowing what to expect. That way, you can be ready to enjoy your retirement.
If you have any tips or advice of your own for other folks who are nearing retirement age and planning towards retirement, we invite you to share them here in the comments section below.