Retirement is that moment every worker eagerly awaits, that day when the alarm clock no longer rings and life truly begins. But if you’re already retired or about to finish your working life, you’ve probably asked yourself this question: does my pension have to pay taxes?
And the answer isn’t as straightforward as it seems. Although many people believe they don’t have to pay taxes on their check, the reality is that it may be subject to tax withholdings, and failing to do so might lead to an unpleasant surprise, because the Internal Revenue Service (IRS) watches everything closely and also determines how much of your check is taxable and whether you have other income you need to declare. We’re going to clear things up and explain who has to pay, how much, and how, we don’t want any surprises, especially at an age when the heart can’t take them!
Why can your retirement check be taxed?
Although it may seem unfair, the reason is simple: Social Security benefits were created to supplement the income a person receives, but not to completely replace it. That’s why, if in addition to your checks you receive money from other sources, the IRS will consider your benefits taxable, but only based on your total income (Modified Adjusted Gross Income – MAGI).
What is the income range?
For single individuals, the income must not exceed $25,000 per year. But if you file jointly with your spouse (you must be legally married), the threshold is $32,000. In both cases, if income exceeds those amounts, the benefits may be taxed up to 85% of the benefits can become taxable.
What are combined incomes?
The IRS calculates these by adding your adjusted gross income, tax-exempt interest, and 50% of your Social Security benefits. Based on this total, the IRS will determine whether your check is tax-free or not.
What types of income make your benefits taxable?
Many retirees have extra sources of income. This doesn’t necessarily mean they’re working, although some are, but any income from rentals, private pensions, investments, or withdrawals from 401(k) accounts will contribute to the total annual income, potentially making your benefits subject to taxes.
Can you reduce how much you pay?
If you have additional income, you’re probably going to have to pay. However, it’s always good to get advice, and our tips are the following:
Consult a professional if you’re unsure whether your income affects your tax withholdings.
- Adjust your income by distributing it across the year.
- Request a direct withholding from the IRS to avoid debts at the end of the year.
- Consider Roth IRA accounts for your funds, they don’t generate taxes when withdrawn!
What is the IRS?
The Internal Revenue Service (IRS) is the federal agency responsible for collecting the country’s internal taxes. They process tax returns, issue refunds when applicable, and can also audit you if they find any irregularities. They’re also responsible for sending out certain tax credits, like the Child Tax Credit or similar programs.
Why do taxes exist?
Taxes exist mainly so that social benefits and public services can continue to operate. You give to the government so the government can return it to you in the form of services, for example, the salaries of public workers, law enforcement, and of course, the very pensions that retirees receive come from the same tax pools.
Not all retirees pay taxes, but many do, so stay informed if you want to avoid unpleasant surprises come April.