Answering the Age-Old Question: Do Retirees Need to File Taxes?

As your retirement years grow nearer, you can’t help but picture your freedom. After working hard for most of your life, you’ll soon have time to go on adventures and learn new skills. Additionally, you won’t have to pay your taxes anymore if you’ll only rely on Social Security (SS) benefits as your source of income in the retirement stage.

In this article, we’ll answer all your questions about retirement tax and explain why some retirees still pay their taxes.

Tax Filing for Retirees

As a retiree, there is a chance that you’ll live your life tax-free. But, to achieve this, there are some deciding factors you need to consider to confidently say that you no longer have to file for a return.

A huge factor is your income amount. If you solely depend on SS as your source of income, you may not owe tax because your income is too low to be taxable. However, if you have other income sources, a portion of your Social Security benefits may get taxed. The taxable amount of your Social Security benefits will depend on your combined income, which comprises of:

• 50% of your SS benefits for the year
• Your adjusted gross income (AGI)
• Tax-exempt interest income (e.g., municipal bonds interest)

For individuals, if your combined income amounts to $24,999 or less, your SS won’t get taxed. If your combined income is $25,000 to $34,000, up to 50% of your SS may be taxable. Combined income that’s more than $34,000 may get taxed up to 85%.

For married couples with joint returns, a combined income of $31,999 or less won’t get their SS taxed, but a combined income of $32,000 to $44,000 may be taxable up to 50%. If the combined income is more than $44,000, up to 85% of SS may be taxable.

All filers who are married with separate returns, regardless of combined income, may get their SS taxed up to 85%.

Who Should You File for a Tax Return?

1. For married with a spouse who’s MORE than 65 years old, filing jointly

If your combined gross income is at least $27,400, you must file a return.

2. For married with a spouse who’s LESS than 65 years old, filing jointly

If your combined gross income is at least $26,100, you must file a return. 

3. For married filing separately but lives in one household

If you and your spouse lived together at any point during the tax year, 85% of your SS benefits may be taxable and considered as gross income, which may require you to file for a tax return.

Standard Deduction for Retirees

Deductions for retirees vary depending on your filing status. The standard deductions for 2021 are as follows:

• Single and married filing separately – $12,550
• Married filing jointly – $25,100
• Head of household – $18,800

Additionally, whether you’re retired or not, as long as you’re at least 65 years of age, you’re eligible for an extra standard deduction of $1,700 (for those who are single or head of household) or $1,350 (if married filing jointly, married filing separately, or a qualified widow or widower). To get an accurate calculation of your deductions and tax return information, you may acquire the help of tax resolution services. 

7 Types of Retirement Income That Might Get Taxed

Many American retirees depend on multiple forms of retirement income aside from Social Security benefits. If that’s also your case, these are the types of retirement income you may get taxed on:

1. Pension Income

For most people, pensions are funded with pre-tax income. It means that throughout your pension contributions, you aren’t taxed. However, you’ll get taxed when you receive your pension funds as a whole. Usually, you’re taxed at your ordinary income rate if your payments are made from private and government pensions.

2. IRAs and 401(k)s

With traditional IRA and 401(k)s, you get taxed at your regular income tax rate whenever you withdraw from your contributions. Meanwhile, for Roth IRA, you won’t get taxed as your qualified contributions for this are funded from after-tax income. 

3. Stocks, Bonds, ETFs, and Mutual Funds

If you’ve held stocks, bonds, exchange-traded funds (ETF), and mutual funds for more than a year, the proceeds are taxed at long-term capital gains rates of 0%, 15%, or 20% when you sell them. The rates you’ll fall in will depend on your income threshold.

4. Annuity Income

An annuity is your insurance contract for retirement. It provides you with a fixed stream of income from your contributions for a certain period. Your principal payment from your annuity is tax-free, while the rest is taxable. For example, if your purchased annuity amounts to $200,000 and accumulates to $250,000 in 10 years, $50,000 (or the earned interest) will be taxable. 

5. Dividend Income

There are two kinds of dividends: qualified and non-qualified. Qualified dividends are taxed at long-term capital gains rates, while non-qualified dividends are taxed at ordinary income tax rates.

6. Interest on a Bank Account

If you have interest payments on savings accounts, money market accounts, and certificates of deposit, you can get taxed at an ordinary income tax rate.

7. Cash-Value Life Insurance

Cash-value life insurance is a living benefit for policyholders, and it includes an investment feature. With this type of income, you may get off tax-free for your whole life, as the IRS will not tax this policy as long as your money grows. If you follow IRS rules, you may avoid taxation on your gains within your policy. 

Don’t Forget Your Taxes

Retirement doesn’t necessarily mean you can avoid paying taxes. That may be the case if you solely depend on Social Security for retirement income, but if you’re like most Americans who have multiple income streams, expect to file for tax returns for years to come.

You don’t have to spend your days crunching numbers when you can finally do the things you love. Enjoy your time as a retiree by letting experts handle your taxes for you. By working with Tax Samaritan, the best-in-class tax resolution partner, you can prevent tax audit mistakes and file your returns confidently and accurately.