Retirement Tax Guide

If you live in the United States, you’re already familiar with
taxes. In retirement, it’s important to recognize how various taxes can impact your income and long-term financial security—especially as these obligations can add up quickly.

Common tax types include sales tax, income tax, estate tax, and gift tax, all of which help fund government obligations. During retirement, staying proactive with tax planning is essential for protecting more of what you’ve earned.

Tax policies often become headline issues during election cycles. With ongoing discussions around potential tax increases, retirees and those approaching retirement frequently wonder how to better manage their tax exposure.

The good news: You have legitimate options to help reduce your tax bill each year. Let’s walk through the key taxes in retirement you might encounter, and topics to review with your financial and tax professionals as you plan for the years ahead.

Income Taxes

Income taxes are the most common type of tax in retirement. Anyone whose income meets or exceeds IRS thresholds must file a return and report that income each year. In general, there are two primary types: ordinary income tax and capital gains tax.

Tax Type	Definition	Common Sources in Retirement
Ordinary Income Tax	Taxed at your top marginal bracket	Pensions, IRAs, 401(k)s, annuity payouts, wages, Social Security (if taxable)
Capital Gains Tax	Tax on profits from sale of assets	Investments, property sales, mutual funds

Ordinary Income Tax

Ordinary income tax applies to earned income and many types of retirement income. Your income is taxed at your top marginal bracket, which determines the rate you pay. For 2025, tax brackets have been adjusted for inflation—review current IRS tables to see where you fall.

Withdrawals from traditional IRAs and qualified retirement plans are always taxed as ordinary income. Income from annuities is also subject to ordinary income tax, whether the annuity is inside or outside a retirement account.

Non-qualified annuities (funded with after-tax dollars) are taxed on a last-in, first-out (LIFO) basis. In practice, this means your gains come out first and are taxed as ordinary income, until all earnings are withdrawn. After that, remaining withdrawals are typically tax-free since they represent a return of principal.

Annuity Type	Tax Treatment	Taxable Portion
Qualified Annuity (IRA/401k)	Ordinary income tax on all withdrawals	Entire distribution
Non-Qualified Annuity	LIFO: Ordinary income on earnings, then tax-free return of principal	Earnings portion only

If you’re self-employed and your business operates at a loss, you may be able to lower your adjusted gross income (AGI) for tax purposes. Ask your financial advisor or tax professional for details on leveraging business and investment losses to help offset taxable income from other sources.

Capital Gains Tax

If you sell assets such as stocks, mutual funds, or property, the gain may qualify for long-term capital gains tax treatment if you’ve held the asset for over a year. Short-term gains (assets held for one year or less) are taxed as ordinary income.

For 2025, the top federal long-term capital gains tax rate is proposed at 39.6% for those in the highest tax bracket—nearly double previous rates for high earners. If significant changes pass, it’s possible we’ll see increased selling activity as investors seek to lock in lower rates while they last.

Asset Held	Holding Period	Tax Rate (2025)
Stock/Property	1 Year or Less	Ordinary income rates
Stock/Property	More Than 1 Year	0%, 15%, or up to 39.6% (top bracket)

Social Security Taxes

The Social Security tax rate is 6.2% on earned income up to $168,600 for 2025. If you’re self-employed, you pay both the employer and employee share for a total of 12.4%. Income earned above this cap isn’t subject to Social Security tax.

Self-employed individuals can deduct half of their Social Security tax as an above-the-line deduction when filing their federal tax return.

Taxes on Social Security Income

Depending on your income, a portion of your Social Security benefits may be taxable. If your adjusted gross income (AGI) plus half of your Social Security benefits exceeds certain thresholds, you may owe tax on up to 85% of your benefits.

Filing Status	Income Range (2025)	Taxable Portion of Social Security
Single	$25,000–$34,000	Up to 50%
Single	Over $34,000	Up to 85%
Married Filing Jointly	$32,000–$44,000	Up to 50%
Married Filing Jointly	Over $44,000	Up to 85%

One way to reduce taxable Social Security income is to lower other taxable income sources. For example, converting pre-tax retirement accounts (like a traditional IRA or 401(k)) to a Roth account may mean paying taxes upfront, but future withdrawals are tax-free—potentially reducing taxable income in retirement and lowering how much of your Social Security is taxed.

If you have traditional retirement accounts, review how your withdrawal strategy impacts both your benefits and your total tax liability. Your financial and tax advisors can help assess if a Roth conversion or other planning moves are right for you.

Medicare Tax and Surtax

Medicare tax is 1.45% of all earned income for W-2 employees in 2025. Self-employed individuals pay both portions (2.9%). If your income exceeds certain thresholds, you may also owe an additional 0.9% Medicare surtax on earnings above that amount.

There’s a separate 3.8% Medicare surtax on net investment income for higher-income households. This can include taxable interest, dividends, capital gains, rental income, and non-qualified annuity payouts. Only the lesser of your investment income or the amount over the income threshold is subject to the surtax.

Income Type	Medicare Tax (2025)	Additional Surtax Applies?
Earned Income (W-2)	1.45% (2.9% if self-employed)	Yes, if over threshold
Net Investment Income	N/A	3.8% if over $200,000 (single) / $250,000 (joint)

Some solutions that may help minimize the Medicare surtax include investing in municipal bonds (interest is tax-free) and tax-deferred annuities. Consult your financial professional for personalized strategies.

Gift Taxes

For 2025, the IRS allows individuals to give up to $18,000 per recipient each year without incurring gift tax. Married couples may give $36,000 to an individual. Gifts to charities, spouses, or for qualified education and medical expenses are generally unlimited and not subject to gift tax. If you exceed these limits, you’ll need to file a gift tax return. The top federal gift tax rate remains 40%.

Gift Recipient	2025 Annual Limit	Taxable?
Individual	$18,000	❌ No (below limit)
Married Couple to Individual	$36,000	❌ No (below limit)
Charity/Spouse/Education/Medical	Unlimited	❌ No
Above Annual Limit	Over $18,000 (or $36,000/couple)	✅ Yes (file gift tax return)

If you want to explore options for minimizing potential gift taxes, connect with your financial and tax professionals for tailored advice.

Estate Taxes

As of 2025, you can transfer up to $13.61 million to your heirs without incurring federal estate tax. Assets above this threshold are taxed at rates up to 40%. The current administration has proposed lowering this exemption to $3.5 million, which would impact high-net-worth households. If Congress acts on these proposals, many families will need to adjust their estate plans.

Year	Federal Estate Tax Exemption	Top Tax Rate
2025	$13.61 million	40%
Proposed	$3.5 million	40%

If you have significant assets, work with your estate planning attorney and other professionals to review strategies for minimizing estate taxes under both current law and potential changes.

The Alternative Minimum Tax (AMT)

The AMT ensures that higher-income taxpayers pay a minimum amount of tax, regardless of deductions or credits claimed. The calculation is complex and requires certain deductions to be added back for AMT purposes. The income thresholds are set by the IRS and adjust for inflation annually.

If your income is below the AMT threshold, you may be able to lower your AGI by contributing to an employer-sponsored retirement plan or a traditional IRA. Discuss these and other strategies with your tax advisor and financial professional.

State Taxes

Many states impose their own income taxes on top of federal obligations. State tax rates and rules vary widely: for example, Kansas charges about 5%, while California’s top rate can reach 13.3%. Some states—including Texas and Florida—have no state income tax at all. Check your state’s current rates and review possible deductions to reduce your liability.

Conclusion

This overview highlights some of the most important taxes to consider in retirement, along with ways you may be able to reduce your tax bill. For guidance tailored to your situation, consult your financial and tax advisors to develop a smart, sustainable tax strategy for both now and the years ahead.