Taxes in retirement

Retirement changes your tax return more than it changes your tax bill. The single W-2 that once summarized your income gives way to a stack of forms: an SSA-1099 for Social Security, 1099-Rs for 401(k) and IRA withdrawals and pension payments, and brokerage statements for interest and capital gains. Each source is taxed under its own rules, and the mix you draw from decides what you owe.

The July 2025 tax law added a new wrinkle: a temporary deduction of up to $6,000 per person for taxpayers 65 and older, in effect through 2028. It lowers many retirees' bills, but it did not change the underlying machinery, including the formula that decides how much of a Social Security check is taxable.

There is one more adjustment to make. No employer withholds taxes for you anymore. Retirees who do not set up withholding or quarterly payments can meet their first underpayment penalty the April after they retire. This article walks through the 2026 federal rules, where states differ, and how to pay as you go.

How Social Security benefits are taxed#

Whether your benefits are taxed depends on what the IRS calls combined income (often called provisional income): your adjusted gross income, plus any tax-exempt interest, plus half of your Social Security benefits ¹.

These are not tax rates. "Up to 85 percent" means up to 85 percent of your benefit counts as taxable income, which is then taxed at your regular bracket. At least 15 percent of every benefit check is always free of federal tax.

The striking thing about these thresholds is their age. Congress made benefits taxable starting in 1984 and set the $25,000 and $32,000 lines then; the 1993 deficit law added the 85 percent tier at $34,000 and $44,000. None of the numbers has ever been indexed for inflation. When the tax first took effect, fewer than one in ten beneficiary families owed it; today roughly half do, and the share drifts upward every year as benefits and other income grow while the thresholds stand still ².

Taxation is separate from the earnings test that can temporarily withhold checks if you are working while receiving Social Security before full retirement age. The earnings test is not a tax, and withheld amounts come back later.

Note: Despite what some headlines suggested, the 2025 law did not make Social Security benefits tax-free. The senior deduction described below reduces taxable income for many retirees, sometimes to zero, but the benefit-taxation formula itself is unchanged.

Sources for this section: [1] [2]

The temporary senior deduction, 2025 through 2028#

The One Big Beautiful Bill Act, signed July 4, 2025, created a deduction of $6,000 for each taxpayer who is 65 or older by the end of the year, or $12,000 for a married couple when both spouses qualify. It applies for tax years 2025 through 2028 and then expires. You can claim it whether or not you itemize, but you must include a Social Security number, and married taxpayers must file jointly ³.

The deduction phases out at higher incomes: it shrinks by 6 percent of any modified adjusted gross income above $75,000 for single filers or $150,000 for joint filers, disappearing entirely at $175,000 and $250,000 ³.

It stacks on top of deductions that already existed. In 2026, the standard deduction is $16,100 for single filers and $32,200 for joint filers, and people 65 and older get a long-standing extra standard deduction of $2,050 (single) or $1,650 per qualifying spouse ⁴. A married couple, both 66, with income under the phase-out could shield $32,200 plus $3,300 plus $12,000, or $47,500, before owing anything.

Sources for this section: [3] [4]

How each account is taxed when you spend it#

Different pots of money follow different rules on the way out.

Traditional 401(k) and IRA money is deferred wages, so every withdrawn dollar lands on your return as ordinary income. One consolation: retirement income skips Social Security and Medicare payroll taxes, so a dollar withdrawn often nets more than a dollar of salary did. Deferral has a deadline, though. Required minimum distributions force withdrawals from most tax-deferred accounts starting at age 73, whether you need the money or not.

A Roth IRA works in reverse: you paid tax going in, so qualified withdrawals come out free, and they never appear in your adjusted gross income. That makes Roth dollars uniquely useful late in retirement, because they do not push Social Security into taxability or trigger the Medicare surcharges described below. Annuity payments from money you bought with after-tax savings are split, with part treated as a tax-free return of what you paid and part as taxable earnings.

Because the rules differ so much, the order in which you tap accounts changes your lifetime tax bill. Retirement withdrawal strategies covers the sequencing question in detail.

Capital gains have their own brackets#

Long-term capital gains and qualified dividends are taxed at 0, 15, or 20 percent based on your taxable income. In 2026, the 0 percent rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers; the 20 percent rate does not begin until $613,700 for joint filers ⁵.

Gains stack on top of ordinary income, so a retiree with modest IRA withdrawals can often realize thousands of dollars of long-term gains in the 0 percent bracket, a practice sometimes called gain harvesting. Two cautions apply. First, realized gains still raise your adjusted gross income, which can make more of your Social Security taxable and lift your Medicare premiums even while the gain itself is taxed at zero. Second, a very large sale, such as a house or business, can jump you into the 15 or 20 percent bracket for that year. Home sellers get a special exclusion on their primary residence, covered in downsizing, and appreciated assets held until death escape capital gains entirely through the step-up in basis, covered in estate planning.

Sources for this section: [5]

State taxes are a separate question#

Most states leave Social Security alone. As of 2026, eight states still tax benefits for at least some residents: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont ⁶. West Virginia, long on that list, finished phasing out its tax in 2026 ⁶. Even the eight taxing states shield most lower and middle incomes; New Mexico, for example, exempts benefits below $100,000 of income for single filers and $150,000 for joint filers, and Colorado lets everyone 65 and older deduct benefits in full ⁶.

Treatment of other retirement income varies more. Some states have no income tax at all, some exempt pensions or a slice of retirement-account withdrawals, and a few tax nearly everything. Property taxes, sales taxes, and any estate or inheritance tax round out the picture, so a state that looks cheap on income tax can be expensive overall.

Sources for this section: [6]

IRMAA: the income surcharge on Medicare premiums#

High earners pay more for Medicare through the income-related monthly adjustment amount, or IRMAA. In 2026, the standard Part B premium is $202.90 a month. Once modified adjusted gross income passes $109,000 for single filers or $218,000 for joint filers, the premium steps up through five tiers, starting at $284.10 a month and reaching $689.90 for incomes above $500,000 (single) or $750,000 (joint) ⁷. Smaller surcharges also apply to Medicare Part D drug plans.

Two features make IRMAA a planning problem. It looks back two years, so 2026 premiums are set by your 2024 return, and the brackets are cliffs: one dollar of extra income can raise a couple's premiums by well over a thousand dollars for a full year. One-time events such as a Roth conversion or a large withdrawal can trip a tier long after the money is spent. If your income has dropped because of a life event such as retiring, divorce, or the death of a spouse, you can ask Social Security to use your newer, lower income by filing Form SSA-44.

Sources for this section: [7]

Withholding and estimated payments#

The IRS expects tax as income arrives, not just at filing time. Retirees have four main tools:

Social Security will withhold federal tax at a flat 7, 10, 12, or 22 percent if you file Form W-4V ⁸. Pension payers withhold based on Form W-4P, and IRA or 401(k) custodians will withhold whatever percentage you elect on withdrawals. Anything left over can be covered with quarterly estimated payments on Form 1040-ES, due in April, June, September, and January.

If too little comes in during the year, an underpayment penalty applies even if you pay in full by April. The usual escape hatches are owing less than $1,000 at filing or having paid in enough during the year to meet the IRS safe harbor tied to this year's or last year's total tax. A common retiree tactic is to have a large share of a year-end IRA withdrawal or required distribution withheld, since withholding is treated as if paid evenly through the year. Charitably minded retirees over 70 1/2 can also send IRA money directly to charity as a qualified charitable distribution, which keeps it out of adjusted gross income altogether and can hold down both benefit taxation and IRMAA.

Sources for this section: [8]

RetiredWiki. (2026, July 6). Taxes in retirement. https://retiredwiki.com/article/taxes-in-retirement