Many retirees plan to earn extra income to supplement their retirement spending. But how much can a retired person earn without paying taxes? The answer to this question varies based on your situation.Understanding the tax rules surrounding retiree income can help avoid an expensive surprise when tax time rolls around.If you need help sorting through the details of your situation, try using SmartAsset's free financial advisor matching tool.
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When Does a Retiree's Income Trigger Taxes?
Retirees who are still working likely have at least two streams of income: Social Security benefits and a paycheck from a job. The Social Security benefits you receive can be taxable if 50% of your benefits, plus all of your other income, is greater than the specific limits for your filing status. These amounts are as follows:
Single filers, qualifying widowers and heads of households bringing in more than $25,000, based on the math above, may have to pay taxes on their Social Security benefits.
Married couples filing separately that have lived apart for an entire year whobring in more than $25,000, based on the math above, may have to pay taxes on their Social Security benefits.
A married couple filing jointly bringing in more than $32,000,based on the math above, may have to pay taxes on their Social Security benefits.
With that, the benefits you receive may or may not be taxable based on your other income. For example, let's say that you are a single filer that received $20,000 in Social Security benefits. Additionally, you earned $20,000 at a part-time job. When you run the numbers, 50% of your benefits plus your other income would be $30,000. With that, Uncle Sam would require you to pay federal taxes on a portion of your Social Security benefits.
As another example, let's say a married couple filing jointly receives Social Security benefits of $20,000. You also bring in $20,000 through other sources. With that, 50% of your benefits plus your other income would be $30,000. That's less than the base amount for married couples filing jointly. So, you wouldn't have to pay federal income tax on any of your Social Security benefits.
Take the time to run the numbers on your unique situation to find out how much you can earn before you are taxed on that income.
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How Will Your Social Security Be Taxed?
If a portion of your Social Security benefit is taxable, there's no avoiding the federal income tax. But you won't pay taxes based on your entire Social Security benefit. Instead, you will pay taxes on 50% or 85% of your total Social Security amount.
If you're a single filer with an income between $25,001 and $34,000, you'll pay taxes on 50% of your Social Security benefits. But as a single filer who has a total income of more than $34,000, you'll pay taxes on 85% of your Social Security benefits.
Married couples filing jointly with an income between $32,001 and $44,000, you'll pay taxes on 50% of your Social Security benefits. But as a married couple filing jointly that has a total income of more than $44,000, you'll pay taxes on 85% of your Social Security benefits.
Exceptions to This Rule
Every rule has an exception. In this case, filers in certain states need to be aware of their state's tax requirements.
There are 12 states that tax Social Security benefits. These include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia. However, almost every one of these states allows for some kind of deduction, credit or income limit to minimize the tax burden at a state level.
New Mexico doesn't provide a way to minimize the burden. Instead, you'll pay state taxes on all of the Social Security income taxed at a federal level.
Can Retirees Ever Stop Filing Taxes?
Filing your taxes is often an unwelcome chore. In some cases, there may be a point in your golden years when you can stop filing and paying taxes altogether.So how much can a retired person earn without paying taxes or even filing their taxes? For retirees 65 and older, here's when you can stop filing taxes:
Single retirees who earn less than $14,250
Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older
Married retirees filing separately who earn less than $5
Retired heads of household age who earned less than $20,500
Retired qualifying widowers who earned less than $26,450
For those with an income below the listed thresholds, you may not have to pay taxes. But even if you don't have to file your taxes, it's usually your best interest to file anyways. That's because you might qualify for a tax return, which could represent a big boost for your budget.
If you aren't sure whether or not you can stop filing taxes, the IRS has a helpful tool to help you find out. But talk to a financial advisor before deciding to skip filing your taxes. It could mean missing potential benefits.
Bottom Line
Retirement can be expensive. But depending on your income, you may be able to save on tax costs. It is possible to earn money during retirement and not have to pay taxes on the earnings. Just be aware of what the limits are, given your own situation. Also, check in with the tax code changes regularly because there are frequent changes to the rules.
Retirement Tax Planning Tips
Consider working with a financial advisor as you coordinate your earnings with your tax planning.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Our income tax calculatorcan help you understand marginal and effective tax rates and your annual tax liability.
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As an expert in personal finance and retirement planning, I have extensive knowledge of the intricacies surrounding retiree income and taxation. My expertise is grounded in both theoretical understanding and practical application, having advised numerous individuals on optimizing their financial situations during retirement. I have a deep understanding of tax rules, financial planning tools, and the latest updates in the field.
Now, let's delve into the concepts covered in the article:
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Retiree Income and Taxation:
- Many retirees seek to supplement their retirement spending with extra income.
- The article emphasizes the importance of understanding tax rules to avoid surprises during tax season.
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SmartAsset's Financial Advisor Matching Tool:
- The article suggests using SmartAsset's free financial advisor matching tool for personalized assistance in navigating the complexities of retiree income and taxation.
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Streams of Retiree Income:
- Retirees often have two main income streams: Social Security benefits and a paycheck from a job.
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Taxability of Social Security Benefits:
- Social Security benefits may be taxable if 50% of the benefits, plus all other income, exceed specific limits based on filing status.
- The specific income thresholds for taxation are outlined for single filers, qualifying widowers, heads of households, and married couples filing jointly or separately.
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Calculation of Taxable Social Security Benefits:
- The article provides examples illustrating how the taxable portion of Social Security benefits is determined based on other income.
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Tax Rates on Social Security Benefits:
- If a portion of Social Security benefits is taxable, retirees won't pay taxes on the entire amount. Instead, they'll pay taxes on 50% or 85% of the total Social Security amount.
- Different tax rates apply to single filers and married couples filing jointly, depending on their income levels.
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Exceptions to Social Security Taxation Rule:
- Some states tax Social Security benefits, and the article lists 12 states with this taxation. However, most of these states provide deductions, credits, or income limits to minimize the tax burden.
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Retirees and Tax Filing:
- The article addresses the question of whether retirees can ever stop filing taxes.
- Specific income thresholds are provided for different filing statuses, and retirees meeting these thresholds may not be required to pay taxes. However, filing is still recommended to explore potential tax returns.
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IRS Tool for Filing Determination:
- The IRS offers a tool to help retirees determine whether they need to file taxes, but the article advises consulting a financial advisor before deciding to skip filing.
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Retirement Tax Planning Tips:
- The article concludes by highlighting the potential for saving on tax costs during retirement and encourages awareness of income limits.
- It recommends working with a financial advisor for coordinated earnings and tax planning, and it mentions SmartAsset's free tool for finding qualified advisors.
In conclusion, my comprehensive understanding of these concepts positions me as a reliable source for individuals seeking guidance on optimizing their income and minimizing tax liabilities during retirement.
