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How Much Can You Expect Your Taxes to Decrease in Retirement?

On average, no expense drops as much in retirement as much as taxes. According to data from the Bureau of Labor Statistics, the average household over 65 pays only ⅓ in taxes what the average American household spends. 

Here’s the tax burden breakdown: 

All Ages65+
Taxes10,8093,466
% Overall Spending15%6%

For many retirees, the bulk of their income comes from Social Security Benefits and according to the IRS, only ~46% of current beneficiaries pay taxes on Social Security. Other sources of retirement income such as IRA withdrawals and interest income are not subject to employment taxes. Qualified dividends and capital gains receive preferential tax treatment. Additionally, many retirees can engage in tax planning to lower their tax rates (e.g. being strategic on when to take social security, capital gains, or IRA withdrawals). 

Let’s look at an example to show how your tax situation can change in retirement.

Let’s pretend a married couple over age 65 in 2023 earned $100,000 in adjusted gross income. They retired at the end of the year and in 2024 received $60,000 in social security benefits and took a $15,000 withdrawal from retirement accounts. They took another $15,000 to cover their cost of living from Roth accounts and regular savings accounts. 

Tax Breakdown by Year: 

20232024
AGI100,00021,850
Standard Deduction30,70032,300
Taxable Income69,3000
Tax7,8520

Because of the way the IRS taxes Social Security, only $6,850 of their Social Security benefits were subject to tax. Combined with their IRA withdrawal they were below the standard deduction and therefore owe no income taxes in 2024! 

Of course, your situation will vary significantly depending on the amount and the sources of your income. If you want to discuss your future tax planning or financial situation, schedule a free consultation and find out how Sophos Wealth Management can help you 

Scott Caufield, CFA, CPA