Many retirees plan to earn extra income to supplement their retirement expenses. But how much can a retiree earn without paying tax? The answer to this question varies depending on your situation. Understanding the tax rules surrounding retiree income can help avoid a costly surprise come tax time. If you need help sorting through the details of your situation, try using SmartAsset’s free financial advisor matchmaker.
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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 salary from a job. The Social Security benefits you receive may be taxed if 50% of your benefits, plus all of your other income, are more than the specific limits for your situation. These amounts are as follows:
Singles, qualifying widows and heads of households making more than $25,000, based on the math above, may have to pay taxes on their Social Security benefits.
Married couples filing separately who have lived apart for a full year and earn more than $25,000, based on the math above, may have to pay taxes on their Social Security benefits.
A married couple filing jointly for more than $32,000, based on the math above, may have to pay taxes on their Social Security benefits.
With this, the benefits you receive may or may not be taxable based on your other income. For example, let’s say you’re an individual who received $20,000 in Social Security benefits. In addition, you earned $20,000 at a part-time job. When you run the numbers, 50% of your benefits plus your other income will be $30,000. With this, Uncle Sam would require you to pay federal taxes on a portion of your Social Security benefits.
As another example, suppose a married couple filing jointly receives $20,000 in Social Security benefits. You also bring in $20,000 through other sources. With this, 50% of your benefits plus your other income would be $30,000. This is less than the basic amount for married couples filing jointly. Therefore, you will not have to pay federal income tax on any of your Social Security benefits.
Take the time to run the numbers for your unique situation to find out how much you can earn before you’re taxed on that income.
How will your Social Security be taxed?
If a portion of your Social Security benefit is taxable, there is no avoidance of federal income tax. But you won’t pay taxes on your total Social Security benefit. Instead, you’ll pay taxes on 50% or 85% of your total Social Security amount.
If you’re an individual with income between $25,001 and $34,000, you’ll pay taxes on 50% of your Social Security benefits. However, as a single filer who has a total income of more than $34,000, you will pay taxes on 85% of your Social Security benefits.
Married couples filing jointly with income between $32,001 and $44,000 will pay taxes on 50% of your Social Security benefits. But as a married couple filing jointly with a combined 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 should 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 some type of deduction, credit, or income limit to minimize the tax burden at the state level.
New Mexico does not provide a way to minimize the burden. Instead, you will pay state taxes on all Social Security income that is taxed at the 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 retiree earn without paying taxes or even filing their taxes? For retirees aged 65 and over, here’s when you can stop filing taxes:
Single retirees earning less than $14,250
Married retirees filing jointly who earn less than $26,450 if one spouse is age 65 or older, or who earn less than $27,800 if both spouses are age 65 or older
Married retirees filing separately and earning less than $5
Retired heads of household who earned less than $20,500
Qualifying widowed retirees who earned less than $26,450
For those with income below the stated limits, you may not have to pay taxes. But even if you don’t have to file your taxes, it’s usually in your best interest to file anyway. That’s because you may qualify for a tax return, which could be a big boost to your budget.
If you’re not sure if you can stop filing taxes, the IRS has a helpful tool to help you find out. But talk to a financial advisor before you decide to skip filing your taxes. It could mean missing out on potential benefits.
Pension 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 know what the limits are, given your own situation. Also, check in with the tax code changes regularly because there are frequent changes in 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 difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who 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 calculator can help you understand your marginal and effective tax rates and your annual tax liability.
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