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How Does Filing Your Taxes Change in Retirement?
You’ve worked your entire adult life—and as you get closer to retirement, you can almost taste the freedom that comes along with it. Soon you’ll get to spend time doing the things you love, going on adventures, and learning new skills.
In order to make sure that retirement is as easy and stress-free as you expect it to be, you’ll want to prepare yourself beforehand and learn how things might change from a financial perspective once you leave the workforce. For example:
- How do you draw money from your retirement fund?
- Are you covered from a health insurance perspective?
- Do you still need to file taxes in retirement?
These are all questions that are good to have an answer to so that you can throw your retirement party with a clear vision of what your golden years will look like.
Do Retired People File Taxes?
The answer? It depends. If you’ve retired in Pennsylvania, there's no state tax on most retirement accounts. However, you may still need to file federal taxes. To help you navigate these nuances, we’ve broken down the details below.
Federally
Whether or not you have to file your taxes depends on your retirement income source, as well as how much you draw out of it within the tax year. Retirees whose only source of retirement income is social security won’t owe any federal taxes. As such, they don’t need to file a tax return. That said, for people who have additional sources of retirement income, the federal government can tax up to 85% of social security benefits.
Withdrawals from Roth IRA accounts are tax free—so retirees that rely primarily on this type of account might not need to file federal taxes. However, distributions from 401(k) plans and traditional IRA accounts are taxable and as such, need to be documented in a tax return.
In the Keystone State
The great thing about retiring in Pennsylvania is that the state itself does not tax people on social security, IRA, and 401(k) accounts. Along with this, if you are part of a pension plan and above the age of 60, you won’t be taxed on any income from that, either. With all these exemptions, it’s no surprise that Pennsylvania is considered one of the top 10 states to retire in.
Now, if you’re still planning to work on a part-time or freelance basis, perhaps as a consultant, or have investments outside of your retirement funds, you will still have to file both federal and state taxes on any income generated from those channels.
How to Know If You Need to File Taxes
Because state taxes in Pennsylvania exempt retirees, we’ll focus entirely on federal taxes in this section.
It all comes down to how much money you’re receiving. By only having one source of retirement income (e.g. social security), it’s likely that the amount of money you’re receiving every year is too low to be taxed. But if you’ve set up more pension and retirement accounts over the course of your career, it’s possible that you’re bringing in enough funds to be taxed by the federal government.
Let’s break it down a little more. Overall, 40% of retirees end up being taxed on their social security, usually because they have additional taxable income. This “combined income” is equal to your adjusted gross income plus any nontaxable interest and one-half of your Social Security benefits.
If you are filing as an individual and your combined annual retirement income is at or below $24,999, you won’t be taxed on what you receive from social security. After that, any amount between $25,000 and $34,999 means that your social security can be taxed up to 50%. If you have more than $35,000, your social security income can be taxed up to 85%. For those filing a joint return with a spouse, if your “combined income” numbers are between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits, and 85% of your benefits if your combined income is more than $44,000.
If your income falls in any of the taxable amounts above, or if you receive income from pensions or other taxable retirement plans, you’ll have to include that in your tax forms. So, as tax season gets closer, talk to your accountant about where you stand and what you need to do to prepare.
