5 Common Reasons Retirees Owe Taxes Even When Income Looks Low
Many seniors are shocked when they end up holding a tax bill despite having a relatively modest income for the year. The question as to exactly what may have triggered tax owed is usually top of mind.
Here are the tax considerations retirees have to keep in mind for their own fiscal well-being.
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Tax Owed Depends on a Few Variables
For starters, retirees should know that, per the IRS, a portion of Social Security benefits are taxable — and that the threshold is really quite low in terms of starting to have to pay income tax with benefits included. In order to calculate your combined income, you add together your adjusted gross income (minus Social Security benefits), your nontaxable interest and half of your Social Security benefits.
If that figure exceeds $25,000 as a single-filer or $32,000 if you file jointly, at least a portion of your Social Security benefits will be taxed. Certain states, including Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island and Utah also levy state taxes on Social Security income.
Taxable Interest (and Even Nontaxable Interest) Can Create Hidden Tax Bills for Retirees
This one gets missed too often. The IRS considers taxable interest — including many dividends, interest in bank accounts, money market accounts and CDs — to be taxable income as a whole. Savings bond interest, interest on tax refunds and interest income from T-bills, notes and bonds also count as taxable income.
And as Fidelity said, even reinvested dividends are typically considered as taxable income in the year they are received — even if you don’t withdraw them from the account. That’s why if you hold significant amounts of money in dividend-accruing investments, it’s wise to ensure you’re putting away at least some of these gains for your tax bill rather than letting the entire portion be reinvested.
Again, that nontaxable interest can also be pesky. While not considered strictly taxable income, enough of it can push your Social Security benefits into taxable territory, as mentioned earlier.
Other Tax Triggers
Some other reasons lower-income retirees might get a surprise tax bill commonly include:
Exceeding $400 in Self-Employed Income
Side businesses, even when modest, can add taxable income: It only takes $400 in yearly net earnings for a side hustle to trigger self-employment taxes, per the IRS.
Miscalculating What Is Owed
Estimated payments and withholding math are often confusing. Kevin McCormally of Kiplinger said that retirees might be confused by unforeseen tax bills due to a lack of understanding surrounding estimated payment schedules (four equal installments sent to the IRS annually for retirees), as well as withholding options.
Increasing your withholding amount on Social Security benefits and IRAs — particularly those related to required minimum distributions (RMDs) — can save you a tax headache. When taking RMDs, also consider doing so in December with a massive withholding carve-out to cover all of your tax obligations —at least if you can afford to live without that money throughout the rest of the year.
Misunderstanding the Working Families Tax Cuts
As part of the One Big Beautiful Bill Act enacted July 4, 2025, a new and additional $6,000 tax deduction is available (through 2028) to eligible seniors aged 65 and up. Per Fidelity, this comes with certain criteria that you want to ensure you're on the right side of.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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