March 17, 2016
How Federal Taxation Drops for Retirees
Taxes are not as inevitable as most people assume. As the chart shows, the share of Americans paying federal income taxes falls precipitously after age 60.
Young adults often have little or no tax liability, because they’re either in school or aren’t yet earning very much. Older people revert to a similar picture, after having paid taxes all their lives.
The peak occurs around age 50, when nearly 80 percent of households pay federal income taxes. That share plummets to half at age 65 and to just over a third at 70, according to The Hamilton Project at The Brookings Institution, which produced the chart. [The chart is based on 2007 data; there may be some changes in current data, though not in the age patterns.]
This is important information for most baby boomers, because their tax picture will change dramatically in retirement. Taxes paid, as well as the share of people paying taxes, decline because retirees’ incomes generally fall below what they earned while they were working.
Further, U.S. tax policy provides additional deductions and credits for people over age 65. While some people pay taxes on their Social Security benefits, this usually happens, according to the Social Security Administration, “only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.”
As the chart makes crystal clear, tax considerations are a crucial part of retirement planning.