How Much Retirement Income Can I Make Without Paying Taxes?

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Paying taxes was something you did most of your life. Now that you are getting closer to retirement, you dream of a time when taxes are no longer something you have to pay. Besides, you want to keep as much of your retirement savings and Social Security in your pocket as you can. Although it is possible to live without paying taxes in retirement, there are some things you need to think about long before you work your last day.

Taxes on interest payments and withdrawals from tax-deferred retirement accounts get added to the calculation of whether you will pay taxes or not. The Internal Revenue Service sets limits on how much you can make before requiring taxes. If you make more than those limits, you will pay taxes at 50 percent or 85 percent of your Social Security income and taxes on your other income.

When You Need to Pay Taxes on Social Security

There is never a time when you will not pay taxes on your Social Security income if you make more than the set limits. It does not matter if you have or have not reached full retirement age (usually 66–67, depending on what year you were born). Your taxes will depend on your adjusted gross income plus any nontaxable interest and one-half of your Social Security income.

You will not need to pay any tax on your Social Security income if you are single, a qualifying widower, or married filing separately (if you lived apart for the entire year) if you make less than $25,000. In those categories, individuals will pay taxes at their regular bracket rate of 50 percent of their Social Security income if they make between $25,000 and $34,000. Income above $34,000 is taxed at 85 percent of their Social Security income.

Couples who are married filing jointly and making less than $32,000 will not pay any tax on their Social Security income. Taxes will be levied at their regular bracket rate on 50 percent of their Social Security income when they make $32,000 to $44,000. When their income is above $44,000, they pay taxes on 85 percent of their Social Security income.

State Tax on Social Security

In addition to federal taxes, 13 states will tax your Social Security income. If you live in one of these states, you will pocket even less of your monthly Social Security payments. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, West Virginia. The Federation of TaxAdministrators website will show you where to find out more about each state’s taxes.

Because of state taxes on Social Security, some people may need to move to a different state to keep most of their retirement income in their pocket. If this is your situation, you may want to include a move as part of your retirement income strategies. Also, if you plan on working after retiring, you may want to wait to collect Social Security until after you reach full retirement age. It will enable you to get your full Social Security benefits.

State Taxes on Other Retirement Income

States vary by which ones tax your retirement income. AnnuityExpertAdvice says that while some states may not tax you on Social Security, they may tax you on income from pensions, 401(k)s, annuities, Thrift Savings plans, IRAs, or military retirement income.

Reduction in Social Security Benefits

If you have not yet reached full retirement age and collect Social Security benefits, the Social Security Administration (SSA) will reduce your Social Security benefit if you make more than the limit. The limit for 2022 is $19,560. Going over that amount means you will be charged $1 for every $2 you are over the limit.

The limit is more than doubled in the year you reach full retirement age, which is $51,960. If you earn more than that the month before reaching your full retirement age, the SSA says you will be charged $1 for every $3 over the earnings limit.

After you reach your full retirement age, there will be no further reduction of your Social Security benefits. It does not matter how much you earn—from that point on, you will receive your full benefits. If you have had your Social Security benefits reduced because of too high earnings, you will get them back in installments after you reach your full retirement age.

All of your earnings, up until you reach your full retirement age, will increase your Social Security income. You cannot increase your benefits once you have reached your full retirement age.

Required Minimum Distributions

When you develop a strategy to pay no or as few as possible taxes, you need to consider your income long range. Some retirement accounts, such as IRAs and 401(k)s, have required minimum distributions (RMDs), which may add to your taxable income. If you do not take RMDs when required, you could forfeit a penalty of 50 percent of the amount you should have withdrawn.

You may avoid some taxes by converting traditional IRAs and 401(k)s to a Roth IRA, which has no RMDs. FINRA says it will be necessary to pay taxes on money put into tax-deferred retirement accounts when the money is withdrawn. Some retirement accounts require that you have them for five years before you get any tax-free benefits.

If you have investments of any kind, you must also consider how much interest you get each year. MotleyFool says it includes CDs, interest from bonds, and interest earned on your checking and savings accounts. This money will have to be added to your total income when calculating it. If you sell an investment and have gained from the sale, you will also be required to pay long-term or short-term capital gains tax on that money.

Contributions to Retirement Accounts While Working

While you are still working, even part-time, you can still contribute to employer-sponsored retirement accounts. Fidelity says that as long as you are working, you do not have to take RMDs until you retire.

Reducing your income after retirement will likely require some serious retirement income planning. You will have to estimate retirement income years in advance to do so with any accuracy. It will probably be necessary to get professional help if you have multiple retirement accounts and investments.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.