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Retirees Need to Focus on Taxes, not Income.

Return to Expenses


Uncle Sam Wants Your Retirement Funds

As mentioned earlier, income management in retirement needs to focus on tax implications.  Since income is net of taxes and US taxes are progressive (tax rate increases with income), you need to be vigilant regarding the tax impact (expense) of actions taken to secure income.  Any time you receive money from pensions or annuities or receive distributions of dividends, interest or capital gains, you generate a corresponding tax bill.  Even interest from “tax-free” municipal bonds is considered in the tax calculation.  You may also generate a tax bill from your Social Security income or from your investment withdrawal.  The more you withdraw/receive in the same tax year, the higher percentage you’ll pay and the less income you’ll have.  As the following example illustrates, if you’re married and filing jointly you’ll pay only 10% tax on the first $19,050 received, but 12% or more on greater amounts (37% tax on income/withdrawal dollars over $600,000).

Schedule Y-1 Example — Married Filing Jointly (2018)

If taxable income is over --
But not over--
The Tax is:
$0
$19,050
10% of taxable income.
$19,050
$77,400
$1,905 plus 12% of the amount over $19,050.
$77,400
$165,000
$8,907 plus 22% of the amount over $77,400.
$165,000
$315,000
$28,179 plus 24% of the amount over $165,000.
$315,000
$400,000
$64,179 plus 32% of the amount over $315,000.
$400,000
$600,000
$91,379 plus 35% of the amount over $400,000.
$600,000
no limit
$161,379 plus 37% of the amount over $600,000.

Schedule X Example — Single (2018)

If taxable income is over --
But not over--
The Tax is:
$0
$9,525
10% of taxable income.
$9,525
$38,700
$952.50 plus 12% of the amount over $9,525.
$38,700
$82,500
$4,453.50 plus 22% of the amount over $38,700.
$82,500
$157,500
$14,089.50 plus 24% of the amount over $82,500.
$157,500
$200,000
$32,089.50 plus 32% of the amount over $157,500.
$200,000
$500,000
$45,689.50 plus 35% of the amount over $200,000.
$500,000
no limit
$150,689.50 plus 37% of the amount over $500,000.

Schedule Z Example — Head of Household (2018)

If taxable income is over --
But not over--
The Tax is:
$0
$13,600
10% of taxable income.
$13,600
$51,800
$1,360 plus 12% of the amount over $13,600.
$51,800
$82,500
$5,944 plus 22% of the amount over $51,800.
$82,500
$157,500
$12,698 plus 24% of the amount over $82,500.
$157,500
$200,000
$30,698 plus 32% of the amount over $157,500.
$200,000
$500,000
$44,298 plus 35% of the amount over $200,000.
$500,000
no limit
$149,298 plus 37% of the amount over $500,000.


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Taxes on Social Security Benefits

You may have to pay income taxes on your Social Security benefits if you have other income.  About one-third of people who get Social Security have to pay taxes on a portion or all of their benefits.

  • If you file a federal tax return as an “individual,” and your combined income* is between $25,000 and $34,000, you may have to pay taxes on 50 ­percent of your Social Security benefits. If your combined income is more than $34,000, up to 85 percent of your Social Security benefits are subject to income tax.

  • If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income that is between $32,000 and $44,000. If your combined income is more than $44,000, up to 85 percent of your Social Security benefits are subject to income tax.

  • If you are married and file a separate return, you probably will pay taxes on your benefits.

* Use the following to determine your Combined Income:

Your Adjusted Gross Income
+ Nontaxable Interest
+ 1/2 of Your Social Security Benefits
= Your "Combined Income"

At the end of each year, you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. You can use this statement when you complete your federal income tax return to find out if you have to pay taxes on your benefits.

Money invested in traditional IRA or 401(k) accounts is taxable when it is withdrawn, and it must be withdrawn in annual installments (according to IRS Uniform Lifetime schedules) beginning at age 70 ½.  Money invested in Roth IRAs or Roth 401(k)s grows tax free, is not taxable when withdrawn, and has no withdrawal requirements.