For some retirees, there’s an unanticipated freedom that comes with aging: not having to file a federal tax return.
Due to a combination of limited taxation on Social Security benefits, the tax-free status of some other retirement income — i.e., Roth IRAs — and other tax breaks for older Americans, retirees can reach a point where they owe nothing at tax time and therefore are off the hook for filing.
The bottom line is this: Retirees whose only source of income is Social Security generally have no taxes due and therefore don’t need to file a return. For others it depends.
“It’s a very common experience for more modest [earners],” said certified financial planner and CPA DeDe Jones, managing director of Innovative Financial in Lakewood, Colorado.
“They’re incredulous when it happens, because they’ve filed returns for 50 or 60 years and it’s the end of an era,” Jones said.
For starters the IRS uses your “combined income” to determine how much of your Social Security benefits are taxable, if any. To arrive at that amount, add one-half of your benefits to your adjusted gross income and nontaxable interest (i.e., from municipal bonds).
Married couples who file a joint tax return owe no tax on their benefits if that so-called combined income falls below $32,000. If it lands between $32,000 and $44,000, up to 50 percent of benefits could be taxed, and incomes above $44,000 face up to 85 percent taxation on benefits.
For single filers, the combined-income taxation threshold is $25,000. The 50 percent tax on benefits hits combined incomes from $25,000 to $34,000, and 85 percent for amounts above that.
For people tapping their Roth IRA — whose withdrawals generally are tax-free in retirement — a tax return might not be needed.
For illustration, say a married couple has two sources of income: Social Security ($30,000 annually) and a Roth IRA ($30,000 each year). Because the Roth distributions are untaxed and their Social Security benefits fall below the $32,000 threshold, all of that income would be tax-free.
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Even some taxpayers with sources of taxable income, such as a traditional IRA or 401(k) plan — and whose Social Security ends up getting partly taxed — can find themselves without a filing requirement.
“Once you subtract out the standard deduction, they sometimes don’t have any tax liability,” Jones said.
Because the standard deduction has nearly doubled for all taxpayers for 2018 through 2025 — and taxpayers age 65 or older continue getting an extra deduction — there’s a chance even more retirees won’t have to file than in the past.
For married couples filing a joint return, the standard deduction is $24,000. The 65-and-older crowd also gets an additional break of $1,600 if married. For single filers, the standard deduction is $12,000, with those age 65 and older getting an additional deduction of $1,300.
Keep in mind, however, that personal exemptions have been eliminated.
Jones said retirees who reach this nonfiling status can be caught off guard.
“Filing tax returns is something so ingrained in our culture that people sometimes miss it in a strange way,” Jones said. “People don’t expect it, but being part of that annual ritual might not be in the cards for them anymore.”
