Do I need to file and pay taxes on just $20K of retirement income?

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The Credible Money Coach helps retiree understand tax liabilities for $20,000 in retirement income. (Credible)

Dear Credible Money Coach,

I am single. My Social Security benefit is $17,000 per year and I have a pension of $3,400 per year. According to what I have read, I do not need to file or pay taxes on this amount. Am I correct? — Kim

Hi Kim, and thanks for your question. The federal tax code is vastly complex, so it may not be surprising that the answer to your question isn’t a straightforward yes or no, but rather "it depends."

I’ll share some basic information that may be helpful, but I also urge you to always check with a qualified tax professional when you have a question about your federal or state income tax obligations. 

Do you have to file a tax return?

Based on the IRS draft instructions for the Form 1040 that we’ll all be filing for 2021 in April 2022, I’d say you probably won’t be required to file a federal income tax return.

Each year, the 1040 instructions include a chart to help people understand whether they need to file a federal return. For 2021, the instructions say single people need to file a tax return if their gross income was at least $12,550 and they’re younger than 65, or $14,250 if they’re older than 65. So if your income was from a wage-earning job or self-employment, you’d likely have to file.

But the instructions also say that as a single person you don’t have to include your Social Security benefits in your gross income unless half of your Social Security income, plus your other gross income and tax-exempt interest, is more than $25,000. Dropping half your Social Security from your income calculation leaves you with just $11,900 of gross income — well below the required threshold to file. But as we’ll see in a moment, just because you don’t have to file a tax return, doesn’t mean you shouldn’t file one anyway.

Do you have to pay taxes?

Probably not. Generally, if your gross income is less than the standard deduction amount for your filing status, your federal income tax obligation is likely zero. For 2021, the standard deduction for single filers is $12,550.

Using a free online tax calculator could help you get an idea of how much, if any, tax you might owe.

A final word

This information assumes you have no other sources of income than the Social Security and pension you mentioned in your question. If you have investments, interest earnings or other income streams, those will affect your tax liability and filing responsibility.

Finally, even if you’re not required to file a federal income tax return, in certain situations you may want to file one anyway. If you’re eligible for any refundable tax credits, or didn’t get the full amount of pandemic stimulus payments you’re entitled to, filing a federal return may be the only way to get any amount you’re owed.

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About the author: Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.