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Generally speaking, retirees' taxable income sources will fall under one of two federal tax categories:
Ordinary income, which is taxed from 10% to 37% and includes:
- Wages paid by an employer
- Interest payments (excluding those from tax-free municipal bonds)
- Ordinary dividends
- Short-term capital gains (on assets held a year or less)
- Taxable withdrawals from retirement accounts
- Taxable Social Security benefits
- Withdrawals from health savings accounts (HSAs) for nonqualified expenses
- Annuity payouts
- Rental income
- Pension payouts
Long-term capital gains, which are taxed at 0%, 15%, or 20%,
depending on your total taxable income, and generally include
profits from:
- the sale of a business,
- real estate, securities, and
- most other assets held longer than a year, as well as qualified dividends.
In addition, a Medicare surcharge (IRMAA) could be added to your Part B and D premium if you fall into higher tax brackets.
How much are you withholding?
To complicate matters, taxes are automatically withheld from some income sources but not from others—and the amounts withheld may not satisfy your actual tax liability.
What do you owe?
If you're newly retired, figuring out your tax bill for the first time can feel intimidating, especially because there's no IRS calculator or tool to ensure success. To calculate your estimated taxes, see Form 1040-ES.
What's your payment plan?
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