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Income Taxes

Retirees Need to Focus on Taxes, not Income.

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 obtain 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 (see below).

Also, the government requires you to withdraw specific amounts (Required Minimum Distributions) from certain retirement investment accounts each year beginning at age 70 ½. Money invested in these accounts is taxable when it is withdrawn, and it must be withdrawn in annual installments (according to IRS Uniform Lifetime schedules). These schedules are used to calculate withdrawals based on your accounts' prior end-of-year balances and your age. RMDs apply to most types of retirement plans including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans. See the Investment Fund Income page of this website for more information on RMDs.

Money invested in Roth IRAs or Roth 401(k)s grows tax free, is not taxable when withdrawn, and has no withdrawal requirements.

In retirement, many of you have the option of determining your annual income. You decide how much of your investments to "cash in" (above RMD requirements) and how much to save for later years. Presumably, you make this decision assuring that you won't run out of money during your lifetime. Correspondingly, you have to consider what percent of your income you pay to Uncle Sam. The more you withdraw/receive in the same tax year, the higher percentage you’ll pay and the less net income you’ll have.  As the tax tables at the bottom of this page illustrate, if you’re married and filing jointly in 2022, you’ll pay only 10% tax on the first $20,550 received, but 12% or more on greater amounts (37% tax on gross income/withdrawal dollars over $647,850).

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.

"Combined Income" is defined as the sum of your Adjusted Gross Income, nontaxable interest and half of your Social Security benefit.

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.

Standard Deduction

There are two main types of tax deductions: the standard deduction and itemized deductions. The IRS allows you to claim one type of tax deduction, but not both. Tax deductions are subtracted from your Adjusted Gross Income (AGI), lowering your taxable income.

For 2022, the Standard Deduction Amounts are as follows:

Filing Status
Standard Deduction Amount
Deduction if 65 or older
Single
$12,950
$14,700
Married Filing Jointly or Qualifying Widow(er)
$25,900
$27,300
Married Filing Separately
$12,950
$14,300
Head of Household
$19,400
$21,150

Taxes on Stock Sales

When you sell stock, you are responsible for paying taxes only on the profits -- not on the entire sales proceeds.

To determine profit, you first need to calculate the cost basis (also known as tax basis) for the shares of stock that you are selling. This consists of the amount you paid to buy the stock shares plus any commissions or fees you paid to buy and sell them. This amount needs to be subtracted from your total proceeds to obtain profit.

  • Cost basis = Price paid per share times # of shares sold + Commission and fees
  • Profit = Proceeds from sale - Cost basis

Profit from the sale of stock shares is considered as either short-term or long-term capital gains depending on how long the shares were held. Generally speaking, if you held your shares for one year or less, then profits from the sale will be taxed as short-term capital gains. If you held shares for more than one year before selling them, the profits will be taxed at the lower long-term capital gains rate.

Both short-term and long-term capital gains tax rates are determined by your overall taxable income. Short-term capital gains are taxed at the same rate as your marginal tax rate (tax bracket).

For the 2022 tax year (i.e., the taxes most individuals will file by April 17, 2023), long-term capital gains rates are either 0%, 15%, or 20% depending on your tax bracket:

Long-Term Capital Gaines Tax RateSingle-Filers (Taxable Income)Married Filing Jointly/ Qualifying Widow(er)Heads of HouseholdMarried Filing Separately
0%
Up to $41,675
Up to $83,350
Up to $55,800
Up to $41,675
15%
$41,676 - $459,750
$83,351 - $517,200
$55,801 - $488,500
$41,676 - $258,600
20%
Over $459,750
Over $517,200
Over $488,500
Over $258,600

2022 Individual Income Tax Brackets

Married Filing Jointly
Single / Unmarried
Married Filing Separately
Head of Household
Married Filing Jointly or Qualifying Widow/Widower (2022)
If taxable income is over --
But not over--
The Tax is:
$0
$20,550
10% of taxable income.
$20,551
$83,550
$2,055 plus 12% of the amount over $20,550.
$83,551
$178,150
$9,615 plus 22% of the amount over $83,550.
$178,151
$340,100
$30,427 plus 24% of the amount over $178,150.
$340,101
$431,900
$69,295 plus 32% of the amount over $340,100.
$431,901
$647,850
$98,671 plus 35% of the amount over $431,900.
$647,851
no limit
$174,253.50 plus 37% of the amount over $647,850.
Single / Unmarried Individuals (2022)
If taxable income is over --
But not over--
The Tax is:
$0
$10,275
10% of taxable income.
$10,276
$41,775
$1,027.50 plus 12% of the amount over $10,275.
$41,776
$89,075
$4,807.50 plus 22% of the amount over $41,775.
$89,076
$170,050
$15,213.50 plus 24% of the amount over $89,075.
$170,051
$215,950
$34,647.50 plus 32% of the amount over $170,050.
$215,951
$539,900
$49,335.50 plus 35% of the amount over $215,950.
$539,901
no limit
$162,718 plus 37% of the amount over $539,900.
Married Filing Separately (2022)
If taxable income is over --
But not over--
The Tax is:
$0
$10,275
10% of taxable income.
$10,276
$41,775
$1,027.50 plus 12% of the amount over $10,275.
$41,776
$89,075
$4,807.50 plus 22% of the amount over $41,775.
$89,076
$170,050
$15,213.50 plus 24% of the amount over $89,075.
$170,051
$215,950
$34,647.50 plus 32% of the amount over $170,050.
$215,951
$323,925
$49,335.50 plus 35% of the amount over $215,950.
$323,926
no limit
$86,127 plus 37% of the amount over $323,925.
Head of Household (2022)
If taxable income is over --
But not over--
The Tax is:
$0
$14,650
10% of taxable income.
$14,651
$55,900
$1,465 plus 12% of the amount over $14,650.
$55,901
$89,050
$6,415 plus 22% of the amount over $55,900.
$89,051
$170,050
$13,708 plus 24% of the amount over $89,050.
$170,051
$215,950
$33,148.50 plus 32% of the amount over $170,050.
$215,951
$539,900
$47,836.50 plus 35% of the amount over $215,950.
$539,901
no limit
$162,218.50 plus 37% of the amount over $539,900.