How much can I earn as a retiree before I have to pay tax on my income?

Dear Credible Money Coach,

I turned 66 in September 2020, and applied for my Social Security benefits. I understand that you have to pay taxes on money earned. I am still working. How does this work? What are the rules and tax laws that apply to someone in my position? Is there a limit on what you can earn that you don't pay tax on? Will there be a time that you can earn as much as you can or want and your earned income won't be taxed? — Ralph

Hi Ralph, and a belated happy birthday! Thanks for your great question. Social Security and income taxes are each complicated topics. Consider them together, and it’s not surprising that a 2018 survey by the Nationwide Retirement Institute found that 37% of retirees hadn’t factored taxes into their retirement planning.

Let’s break your questions down, starting with the last one first because it’s easiest to answer. It’s unlikely there will ever come a time when retired people will be able to earn as much as they want and never pay any federal income tax on it. That said, the federal tax code is intentionally written to lessen the tax burden on senior citizens in many ways.

Let’s look at how your earned income can affect taxation of your Social Security benefits.

What to know about your non-Social Security income

Ideally, when you retire you don’t want Social Security to be your only source of income — largely because even the highest possible monthly benefit amount won’t be enough to cover all your expenses. Most other types of income you’ll have when you’re retired can be subject to federal income tax, and possibly state income tax if you live in a state that has an individual income tax (most do). 

Other types of taxable income you may have in retirement include:

• Wages earned from a job
• Self-employment income
• Interest
• Dividends
• Taxable withdrawals from retirement accounts, like a 401(k) or IRA

All your income combined, including the amount you get from Social Security, will determine if you have to pay federal income tax on your benefits — and, if so, how much of your benefits will be subject to taxation.

How your combined income affects tax on your Social Security benefits

To determine what portion of your Social Security benefits may be subject to federal income tax, add up all your other sources of income — wages, interest, dividends, etc. — and add that to one half of your benefits. Then, compare that combined income total to a base amount the IRS sets for each filing status. 

If your combined income is equal to or less than your base amount, you won’t have to pay federal income tax on any of your Social Security benefits. If your combined income total is more than your base amount, you may have to pay tax on some of your benefits.

For 2020, the base amounts were:

• $25,000 for people filing single, head of household, surviving spouse or married filing separately (and who lived apart from their spouse the entire year)
• $32,000 for people married filing jointly
• $0 for married filing separately for people who lived with their spouses at any time during 2020

Keep in mind, those base amounts could change for 2021 taxes.

So how much tax might you have to pay?

If a portion of your Social Security benefits turns out to be taxable, you’ll have to pay federal income tax on either 50% or 85% of your total benefits. Which percentage applies to you will depend on how much your total combined income exceeds your base amount.

• 50% — For single filers with combined income between $25,001 and $34,000, and for people married filing jointly with combined income between $32,001 and $44,000
• 85% — For single filers with combined income of more than $34,000, and people married filing jointly with combined income of more than $44,000

Here’s an example of how this could work:

• You’re married filing jointly
• One half of your Social Security benefits for the year is $10,000
• Your other sources of income total $20,000
• Your combined total is just $30,000 — below your filing status’s base amount of $32,000
• None of your benefits will be subject to federal income tax

The IRS has resources to help seniors navigate how federal income tax could apply to their Social Security benefits. Check out IRS Publication 915 and Publication 554: Tax Guide for Seniors.

And of course, your earned income may also be subject to taxes, so it may be a good idea to consult a tax professional if you have any questions about your personal tax situation.

This article is intended for general informational and entertainment purposes. Use of this website does not create a professional-client relationship.  Any information found on or derived from this website should not be a substitute for and cannot be relied upon as legal, tax, real estate, financial, risk management, or other professional advice. If you require any such advice, please consult with a licensed or knowledgeable professional before taking any action. 

About the author: 

Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.