Retirement seems to be a blissful next season that any currently working employee desires. Imagine this, you are no longer flagged down by your boss regarding deadlines, you can sleep whenever you want, and you can do whatever activity you have in mind. 

The retirement stage is when you are no longer required to live according to a fixed schedule and when you can rest while enjoying social security benefits. However, one has to remember that certain responsibilities never really leave, one of which is taxes that may affect the social security income you receive.

Retirement and Taxes

Taxes are charged to qualified citizens earning money of a country as their contribution to the continuous progress of the state in exchange for certain social security benefits. It is compulsory, and is virtually in every aspect of life, but is most felt when you are employed. 

Upon retirement, however, many would think that one can immediately be exempt from paying taxes especially when money is sourced entirely from your social security income, yet this is far from the truth. If you are a person nearing the age of retirement or is already retired, read ahead to know whether or not you can be saved from being taxed for whatever money you may be or are receiving.

Maximum Earnings Before Paying Taxes

You might be downcast thinking about how you can still be taxed even after retiring from your job, but there is hope. Taxes for retired individuals are different from those who are still earning. And, there are a variety of levels that you can consider for tax exemptions during retirement. The maximum earnings that a person can make without paying the tax to the government within a certain tax year will be discussed in the next paragraph.

A retiree can earn up to $11 950 and be exempted from paying taxes if s/he is single and is 65 years or older. For couples, they can make up to $23 300 without taxes if they are both 65 years or older and will be filing jointly. If only one is over 65 however, the maximum combined income with no taxes charged is lower at $22 050. To compute your current income to compare it with the allowable limit for exemption, add half of your social security income to your earnings sourced from other places.

State Exceptions

The above-mentioned exemption on taxes is still subject to local state policies. There are some areas wherein even the unearned income such as the social security income is being taxed. In the United States, for example, Minnesota, North Dakota, Rhode Island, Vermont. And West Virginia requires about 85% of its residents to pay taxes using their Social Security incomes. The same benefits are also being moderately taxed in eight other states.

It is, therefore, crucial for you to always keep yourself updated with local policies and other related articles. Tax evasion can put you in a serious situation, so you should know and understand whether or not you should be filing for tax payments or declare exemption in your tax return. It is better to give more effort into researching now than find yourself paying hefty fines later on. Besides, paying your taxes faithfully can help improve the situation of your locality and also secure your earned income.

How Is Social Security Taxed In Retirement?

The social security scheme enables retirees to enjoy the fees they have paid while they were still receiving their earned income in allowances released by the federal government. They serve as a partial replacement for the earned income that the individual used to receive before his/her retirement. You might think that in all years of working and paying taxes, the amount you would, later on, be receiving will be without state fines. Unfortunately, this is not the case.

The social security fee is immediately deducted from your payroll, similar to that of the tax. This percentage of your earned income however is retrieved without being taxed by the federal state. They hold on to that amount for years on end, without removing any percentage for tax from it. Then, when you file for the claiming of the benefits accumulated from your earned income, that is when you can get the income tax for that certain portion.

However, if this is your only source of income, the government can exempt you from paying. This means that your benefits can outweigh what you have contributed as income tax. Many of the benefactors of Social Security receive more income later on than what they paid for. The following chart can help you compute whether or not you will owe the state taxes for the benefits you receive.

Is My Social Security Income Taxable?

This table is a summary of the income tax amounts that apply to Social Security benefits. You may use this as a guide for your computations on whether or not your benefits qualify for the exemption.

IncomeReturn for the Individual
$0 – $24,999No tax
$25,000 – $34,000Taxable up to half of the social security
More than $34,000Taxable up to 85% of Social Security
IncomeJoint Return for Married Couples
$0 – $31,999No tax
$32,000 – $44,000Taxable up to 50% of Social Security
More than $44,000Taxable up to 85% of Social Security
IncomeSeparate Return for Married Couples
$0 and upTaxable up to 85% of Social Security

How Much Can A Retiree Earn Without Paying Taxes?

Retirees can still receive income from a variety of sources that includes but is not limited to, retirement account distributions (401(k)s, IRAs), annuity income, Social Security benefits, and pension payments. Also, there are those who opt to still continue working despite being technically no longer part of the workforce. Retirees can engage in consulting and other self-employment activities. The question, therefore, is how much income can a retiree receives without them getting taxed?

There are different classifications of income types that are defined by the Internal Revenue Service or the IRS. To put it simply, they differentiate it as earned or unearned income. The former are those that the retiree receives from services s/he offers to his clients while the latter pertains to the benefits that s/he receives. There is a difference in the way these two incomes are taxed, and it is necessary to understand the concept to grasp how you, as a retired individual, can be exempted from paying taxes.

Social Security contributions are always withheld from your income when you are still rendering your services to your employer. This occurs whether or not you enjoy Social Security benefits. There are exemptions, however, when your income is below the minimum taxable amount. This will be presented more clearly in another section.

An unearned income, contrary to popular belief, is taxable, but there are certain guidelines. Traditional IRA distributions and contributions for 401(k)s are the typical benefits that are not exempted from taxes. Social Security benefits are subject to further scrutiny as they may or may not be taxable while Roth 401(k)s and Roth IRAs are not. At the end of the day, it is your tax bracket that will dictate whether or not your income, unearned or not, is taxable.

Standard Deductions for Retirees

Presented in this table is a summary of the standard money deductions that can be imposed on retirees. If you are earning less than the amounts indicated here, you may be exempted from paying taxes to the state.

Status Upon FilingStandard DeductionSenior BonusTotal Deduction
Single$12,200$1,650$13,850
Married filing jointly with combined income or Qualified Widow(er)$24,400$1,300/senior spouse$25,700 or $27,000
Married filing separately$12,200$1,300$12,500
Head of Household$18,350$1,650$20,000

As mentioned, those whose incomes are below the indicated amounts are exempted from paying the tax. They may even opt not to file for a tax return although it is beneficial in claiming credits. Refunds and tax credit benefits to which you are qualified for can only be claimed when you file for tax returns, so you should still consider applying for one.

In the year 2019, the standard deduction was at $12,200 for single or married but filing separately taxpayers while it was $24,400 for those who are married but are filing jointly. Heads of households on the other hand are subject to a standard deduction of $18,350. This data is the information used for tax returns filed this year, and the standard deduction of this year will be used for 2021.

An extra standard deduction of $1,650 is also applicable for 65 or older taxpayers. However, this goes down to $1,300 per qualified spouse if they are filing jointly or are qualified widow(er)s. Itemizing your deductions however renders these deductions inapplicable, therefore you should not consider the higher limits indicated above. But, the limits can also serve as your guide for when you will do itemization, such that you can lump large itemizable expenses to a single tax year.

What are the Tax Brackets for 2020?

As mentioned previously, tax brackets are what determines your tax exemptions, hence the necessity to present what applies for this year. Individual taxpayers with incomes that exceed $518,400 or $622,050 for those who file jointly with combined income have a top tax rate that remains at 37%. Other rates are indicated in the table below:

Individual Income OverIncome For Joint Filing OverRate (%)
$207,350$414,70035
$163,300$326,60032
$85,525$171,05024
$40,125$80,25022
$9,875$19,75012

For those individuals whose income is below $9,875 or $19,750 for joint files with combined income, the lowest rate of 10% applies. 

Conclusion

Retirement is the stage in an individual’s life wherein you become excited for reaping the benefits that you have sowed over your many years as a part of the labor force. It is a time to relax and rest after the long and arduous journey called life, and now you can be free to enjoy the things you have normally deprived yourself in the past. However, you should not forget that there are still responsibilities that one must face that involve not just yourself but the rest of the population as well. 

Give to Caesar what is due to Caesar is a popular catchphrase when you talk about taxes. And the statement is correct. Taxes might seem like a huge burden, as you are getting ripped off a certain portion of your income, but they are important for the progress of the society. The activities of the federal government rely on these contributions, and if we are to make the state continue to function properly, we should not be shying away from paying our responsibilities.

There are however plenty of ways to minimize the burden of paying taxes. Yes, these contributions are important but you as the individual paying them are equally crucial. You can be timing your distributions, bunching income and itemizable deductions, and do account conversions to lower the impact of paying taxes. Retirement is a beautiful stage to reach, and you should be able to enjoy it to the fullest while also being a responsible citizen.

Categories: Personal Finance