Understanding Taxes in Early Retirement (Updated for 2026)

Many people expect their taxes to drop significantly once they retire. After all, earned income often disappears. In practice, however, retirement does not automatically lead to a lower tax bill.

For many retirees, taxes remain higher than expected — and in some cases increase — because income continues to come from multiple taxable sources, including retirement accounts, Social Security, pensions, and investments. This guide explains why that happens, outlines key tax rules relevant to early retirement, and highlights common areas that often surprise retirees.

For additional context, see Tax Planning for Retirees and Retirement Income Planning.

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Retirement Does Not Eliminate Taxable Income

While retirement may end wages or salary, it does not eliminate taxable income. Common sources of income in retirement include:

• Withdrawals from traditional IRAs and 401(k)s
• Pension income
• A taxable portion of Social Security benefits
• Interest, dividends, and capital gains from investments
• Rental or other passive income, if applicable

Each of these sources may be taxed differently, but together they often keep retirees in similar tax brackets to their working years — particularly once required minimum distributions begin.

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How Social Security Is Taxed

Social Security benefits may be partially taxable depending on your combined income, which is calculated as:

Adjusted gross income + nontaxable interest + 50% of Social Security benefits

Once combined income exceeds certain thresholds, up to 50% or 85% of Social Security benefits may be included in taxable income. These thresholds are not indexed for inflation, which means more retirees are subject to Social Security taxation over time. The income thresholds are: Single $25,000=50% of benefits are taxable and $34,000=85%. For Married Couples, it is $32,000=50% and  $44,000=$85%. All of my clients are seeing 85% of their SS benefits as taxable.

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2026 Federal Income Tax Brackets

For the 2026 tax year (returns filed in 2027), ordinary income is taxed using the following federal brackets:

These brackets apply to ordinary income, including most retirement account withdrawals and pension income.

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Standard Deduction and Age-Based Increases

For 2026, the standard deduction is:

• $16,100 for single filers
• $32,200 for married filing jointly

Taxpayers age 65 or older receive an additional standard deduction:

• Single filers: +$2,050
• Married filing jointly: +$1,650 per spouse

In addition, a temporary senior bonus deduction of up to $6,000 applies for taxpayers age 65 and older, subject to income phaseouts.

These deductions can reduce taxable income, but for many retirees they do not fully offset income from retirement account withdrawals, Social Security taxation, or required minimum distributions.

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Net Investment Income Tax (NIIT)

Retirees with higher income may also be subject to the Net Investment Income Tax, an additional 3.8% surtax on certain investment income once modified adjusted gross income exceeds:

• $200,000 for single filers
• $250,000 for married filing jointly

Investment income subject to NIIT may include interest, dividends, capital gains, rental income, and other passive income. NIIT does not apply to IRA distributions. Because these thresholds are not indexed for inflation, more retirees encounter NIIT over time, even without a significant increase in lifestyle spending.

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Required Minimum Distributions and Reduced Flexibility

Under current law, required minimum distributions (RMDs) generally begin at age 73, with the starting age rising to 75 for future retirees who were born in 1960 and later.

Once RMDs begin:

• Annual withdrawals are mandatory
• The distribution amount is added to taxable income
• Retirees have limited ability to reduce or defer the income

As a result, many retirees find that once RMDs start, they have far less control over their tax bill from year to year — particularly when RMDs interact with Social Security taxation, NIIT, and Medicare surcharges.

Can You Reduce Required Minimum Distributions?

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IRMAA and Medicare Premium Surcharges

Another common surprise in retirement is IRMAA — the Income-Related Monthly Adjustment Amount.

IRMAA is a surcharge added to Medicare Part B and Part D premiums when income exceeds certain thresholds. Importantly, IRMAA is based on income from two years prior, not current-year income.

This means that a year with higher income — such as large IRA withdrawals or Roth conversions — can result in higher Medicare premiums later, even if income declines afterward. Many retirees first encounter IRMAA only after it has already been triggered. See 2026 IRMAA Information here.

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Why Taxes Often Stay Higher Than Expected

Although employment income may stop, many retirees continue to pay taxes on:

• Retirement account withdrawals
• Pension income
• Taxable Social Security benefits
• Investment income
• Net Investment Income Tax
• Medicare premium surcharges

Once required distributions and Medicare thresholds are involved, tax outcomes are often driven more by rules than by discretionary spending choices.

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Putting the Pieces Together

Retirement tax planning often involves coordinating multiple moving parts, including income timing, withdrawal sources, and age-based rules. While deductions and credits may help, they do not eliminate the underlying complexity.

For a broader view of how taxes fit into retirement decisions, see Tax Planning for Retirees and Retirement Income Planning.

If you would like to discuss how these considerations apply to your situation, you may request an introductory conversation here:
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