Hitting retirement is a milestone, but it can create uncertainty about your finances. One of the major questions we hear is whether retired seniors have to file taxes.
It is a common misconception that retirees don’t have to file taxes; this isn’t always the case. Determining if you should file taxes after retirement depends on several factors like what type of retirement income and investments you have.
The Basics
To determine if you should file federal income taxes when you retire and are 65 years old, the IRS looks at your Adjusted Gross Income (AGI) and tax-exempt interest income.
If the amount you receive in taxable income is over a certain threshold, you will likely need to file a federal income tax return. In 2022, the IRS requires retirees filing as a single individual to have a taxable income of $14,700 after deductions. If filing jointly with a spouse who is also over the age of 65 the amount is $28,700. If your partner is under 65, the total is $27,300. The amounts may differ if you file as the head of household or if you are married filing separately. If your taxable income is at or above these amounts, consult a tax advisor to look at your options.
Taxable income, or AGI, can include:
- Wages from employment or self-employment
- 401(k) and IRA distributions, not including Roth IRAs
- Pension payments
- Rental income, royalties, and passive business income
- Some interest, dividends, and capital gains, not including from municipal bonds.
- A portion of your Social Security income, depending on your household income.
Items generally not included in AGI are student loan interest, alimony payments, some contributions to retirement accounts, and other deductions.
If you qualify for a refundable credit like the earned income credit or American Opportunity credit, the IRS recommends filing a tax return even if you are below the taxable federal income threshold. This helps the IRS process your refund.
What If I Get Social Security Benefits?
As of June 2022, nine out of ten citizens over the age of 65 receive a social security benefit. Between 2015 and 2050 it is estimated that 56% of these individuals will pay taxes on some of their benefits, according to an income modeling project by the Social Security Administration. So, how do you know if you need to pay federal income taxes on your Social Security income?
First, the Social Security Administration will calculate your combined income. This is a total of your AGI, tax-exempt interest payments, and 50% of your social security payment.
In 2022, if you file as an individual and have a combined income of between $25,000 and $34,000, you might have to pay taxes on 50% of your social security income. For an individual combined income of over $34,000, up to 85% of your social security might be taxed. For a joint return, 50% of your benefit can be taxed if your combined income is higher than $32,000. If the combined joint income is over $44,000, 85% will likely be taxed. If social security is your only household income, you are unlikely to have to pay taxes.
Taxes after retirement can sometimes be difficult to understand, and it is always best to consult with a tax professional to go over your finances to see if you need to file a federal tax return. The guidelines for state taxes for seniors vary, and a tax advisor can also help you determine if you need to file taxes in your state.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Sources:
https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
https://www.irs.gov/publications/p505
