19 What About Retirement Taxes?
William was disappointed, even disgusted, to learn that he not only had to pay income taxes on his part-time earnings in retirement but also that his part-time earnings meant that he owed a tax on part of his Social Security benefits. William was even more surprised and disappointed to learn that he must pay income taxes on the payments he had just begun to receive from an annuity that he had purchased years earlier. Not only did the taxes reduce what William could receive and spend or save, but the taxes also required that he retain, consult, and pay tax advisors and tax preparers to handle his complex tax returns. The entire charade sadly reminded William that only two things are certain: death and taxes.
Taxes
In theory, you work your whole life while paying taxes, to enjoy a reprieve from taxes in retirement and maybe even receive a little back. In practice, tax obligations continue for many retirees, sometimes getting more confusing, challenging, and complex across the course of retirement. Real property taxes and taxes on dividends, interest, and earnings continue. Gift taxes may kick in on amounts you’d like to convey to your family members while you still live. Estate taxes are a possibility if you intend to leave a substantial inheritance to your heirs. Of course, you continue to pay sales tax on some goods and potentially on some services. You may also owe a tax on your Social Security retirement benefits, if you earn income exceeding certain amounts, potentially offset by a new and temporary tax deduction for seniors. Tax laws may also force you to distribute amounts out of your tax-advantaged retirement accounts, on which you must pay income taxes. The tax landscape remains complex and potentially burdensome in retirement. Plan for it, avoid the taxes that you lawfully can, and timely pay what you owe.
Income
Tax on your earnings from part-time employment or self-employment during retirement, and on your interest, dividends, capital gains, rents, royalties, and other taxable income, continues. Just because you retire from your full-time employment does not mean that you get to stop paying tax on your part-time work or other income. In many cases, a retiree’s taxable income is below the standard deduction amount, especially in the case of a married couple filing jointly, and especially with both the long-standing additional standard deduction for filers age sixty-five and older plus the new temporary bonus deduction for seniors. But if you make a relatively substantial income from taxable sources, including part-time employment and taxable investments, you may still owe an annual income-tax obligation. You may also owe an obligation to make quarterly payments of those taxes for self-employment income. Consult a tax preparer or advisor to determine your income tax obligations in retirement, and budget accordingly.
Security
Federal law currently also provides for an income tax obligation on a portion of your Social Security retirement benefits, if your taxable income exceeds a certain amount. That’s in part why you wouldn’t generally want to start your Social Security retirement benefits while still working full time. The taxes on your earned income and retirement benefits may together make for a very high marginal tax rate, eating into your combined income. Congress adopted the new temporary bonus income tax deduction for seniors to set off in part the income tax on Social Security retirement benefits. Still, you would be wise to consult your tax advisor or preparer for an estimate of your income tax obligation at various earned income amounts, so that you can judge whether you find it worth working, even part time, while retired and drawing your Social Security retirement benefit. Just be aware that your income tax obligation may be larger than you expect because of a potential tax on your Social Security retirement benefits. Go into the year with open eyes, and plan your earnings accordingly.
Distributions
You may also face an income tax obligation on withdrawals that you make from your 401(k), 403(b), IRA, or similar tax-advantaged retirement accounts. Once again, you might think that since you already earned that money that you put into a tax-advantaged retirement account, that you wouldn’t owe a tax obligation when withdrawing it. The issue is that these tax-advantaged retirement accounts permit you to move pre-tax earnings into them, on the premise that you will pay the income tax on their withdrawal. We tend to forget that we haven’t paid income tax yet on the money in those accounts, nor on their appreciation. Thus, expect to have to report withdrawals from your tax-advantaged retirement accounts as taxable income. Now, you may not end up paying any tax if your withdrawals are moderate in amount and you don’t have other substantial taxable income. Your standard deduction and any other deductions or credits may exceed your taxable income. But that calculation is between you and your tax preparer. Be ready to pay income tax on your withdrawals from tax-advantaged retirement accounts. Figure those taxes into your monthly budget and into the extra amounts you may need to withdraw or earn to pay those taxes.
Required
You might hope, then, that you’d just survive for as long as you could on your Social Security retirement benefits and any other income you have, rather than withdraw any amounts from your 401(k), 403(b), IRA, or other tax-advantaged retirement accounts. The problem is that tax law forces you to make required minimum distributions (RMDs) out of your tax-advantaged retirement accounts beginning at age 73 or 75, depending on the year of your birth. The federal government wants its income tax out of your tax-advantaged retirement accounts, sooner or later. The amount of the annual RMDs, and thus your annual income tax obligation on them, depends on a complex formula. Get help estimating your RMDs now and determining them when you reach the age that you must take them. You don’t have to spend the RMDs out of your retirement accounts. You may place the RMDs right back in a savings account, once you pay the tax obligation out of them, which the account manager may (or may not, at your election) withhold and pay over to the IRS at the time of the distribution. Just be aware that the tax obligations may be substantial and may thus reduce your effective retirement holdings.
Deductions
Tax law permits retirees age 70 1/2 or older to make qualified charitable distributions (QCDs) out of their tax-advantaged retirement accounts, up to a substantial annual limit. A qualified charitable distribution goes straight from your account to a tax-exempt charitable organization of your choice, without you having to pay income tax on the distribution. If you don’t need the retirement income or savings, a qualified charitable distribution can be a great way to increase your charitable donations during retirement, while reducing your income tax obligation, even eliminating that obligation. Again, if you don’t need the retirement income or savings in your tax-advantaged retirement accounts, consider making qualified charitable distributions from age 70 1/2 on, especially in place of the required minimum distributions due at either age 73 or 75. Unless, of course, you’d prefer to see the federal government get a portion of your retirement savings instead of your favorite charity.
Returns
Given the above income tax obligations likely to continue or arise during your retirement, you should expect to file annual tax returns with both state and federal tax authorities, and with any local tax authority to which you may also be subject. While the federal tax obligations are generally the larger ones, state and local taxes can add considerably to a retiree’s tax bill. That tax bill is in part why some states, particularly Florida and Texas, can be popular retirement destinations for those retirees living in high-income-tax states. In any case, expect to continue to employ a qualified tax advisor or preparer to help you ensure that you meet all income tax obligations including the obligation to file annual returns. If you are married, let your tax advisor or preparer help you choose the most-favorable filing status.
Property
If you own a residence or other real property, then you will also continue in retirement to owe whatever real property taxes you owed when still working. Real property taxes can be a significant burden for retirees, especially when home values continue to escalate and tax obligations escalate with them. Retirees in desirable locations along southern coastlines and in other resort, vacation, and retirement destinations can get hit especially hard with increasing real property taxes. Be sure to budget for those taxes, setting aside reserves out of your monthly retirement benefits and income to pay the annual or semi-annual real-property assessments. Don’t get caught delinquent on real property taxes. Real property taxes are generally a lien against the property. State and local authorities may have the power to foreclose that lien and require the tax auction or other sale of your real property, potentially evicting you from your retirement residence. Treat real property taxes as an ongoing obligation, and downsize to another residence before finding yourself unable to pay them.
Gift
Gift taxes are another potential tax obligation in retirement. Retirees who find themselves in a position to bless their children, grandchildren, or others with gifts of substantial value should be aware that a federal gift tax arises on individual gifts exceeding $19,000 in 2026. If you wish to give more than that amount to an adult child or another family member or individual, that individual would have to report the gift and pay tax on the excess. Retirees often thus limit their individual gifts to that amount, giving that amount annually if they wish over a longer period to exceed the annual gift tax deduction limit. Married retirees may each give up to that amount to the same individual, thus doubling the amount an individual may receive from the married couple without paying the tax. You may, of course, give more if you don’t mind seeing the beneficiary of your gift pay the tax, although you and the beneficiary might prefer that you delay your gift and instead convey those more-substantial sums as an inheritance.
Estate
Estate taxes are a potential issue for retirees, when they convey their assets through their probate estate to their heirs as inheritances. Congress has raised the estate tax deduction to $15 million in 2026, meaning that only estates exceeding that value are currently subject to the estate tax. While $15 million may sound like a very large estate to many retirees, well in excess of what they hope to convey to their heirs, farm and business owners may find that their holdings in land, buildings, vehicles, equipment, inventory, intellectual property, and other tangible and intangible assets have values exceeding the estate tax deduction limit, even if their holdings don’t generate substantial cash. Consult a qualified estate-planning and tax attorney regarding your potential estate tax obligation upon your demise. Tax planning strategies may limit or avoid some or all of the estate tax.
Advice
As already mentioned more than once above, get qualified advice from a tax attorney, tax preparer, estate-planning attorney, financial advisor, and other qualified professionals regarding your tax obligations. Tax strategies in retirement can grow more complex than ever, especially with tax-advantaged retirement accounts, required minimum distributions, qualified charitable distributions, income tax obligations on Social Security relative to earned income, gift taxes, estate taxes, and related issues. Taking early distributions out of tax-advantaged retirement accounts before required distributions, or converting tax-advantaged 401(k), 403(b), and IRA retirement accounts to Roth IRA accounts, may reduce tax obligations later and save on your overall tax bill. These and other strategies may be available to you, to lawfully save and avoid many thousands of dollars in tax obligations. Qualified advice may save you more than its modest cost. Get sound advice. If you don’t have skilled, experienced, and trustworthy tax advice, then ask around and do your research for that advice.
Reflection
If you plan to continue part-time employment during retirement, have you estimated if you will owe taxes on your Social Security retirement benefits? Do you know, in other words, if working part time will be worth it, with your increased tax obligations? If you plan to continue part-time self-employment in retirement, have you estimated your quarterly self-employment tax obligation, to see if working is worth it? If you plan to withdraw amounts from your tax-advantaged retirement accounts, have you estimated your tax obligations on those withdrawals, so that you know how much of the withdrawals you will net after taxes? Do you have other sources of support on which you can rely, to avoid or delay paying the tax obligations? Would a Roth IRA conversion make sense to reduce your tax obligation on required minimum distributions? Do you have a skilled, experienced, and trustworthy tax advisor or preparer to help you with preparing and filing tax returns and paying all due income-tax obligations in retirement? Are you budgeting to pay real estate taxes on your residence? Are you limiting gifts to within the annual gift tax deduction limit? Is your estate large enough to implicate an estate tax? If so, have you consulted an estate-planning attorney as to how you might lawfully reduce or avoid that obligation?
Key Points
Tax obligations of various kinds continue and multiply in retirement.
Retirees owe income taxes much as they did during their work life.
Retirees may pay income tax on Social Security if having other income.
Retirees can owe income tax on retirement account distributions.
Retirees must eventually take required distributions (RMDs) to pay tax.
Retirees may make qualified charitable distributions to avoid taxes.
Retirees must continue to file annual tax returns reporting income.
Retirees can also owe real property taxes in substantial amounts.
Individuals receiving substantial retiree gifts may owe gift taxes.
Retirees leaving substantial probate estates may owe estate taxes.
Get good tax advice to timely pay and lawfully reduce tax obligations.