Your Retirement Income and the IRS in 2025: What You Need to Know

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last updated 2 March 2025

As you transition into retirement, your financial landscape can shift dramatically. For some, gone are the days of a W-2 and relatively straightforward tax returns. Retirement brings a complex mix of income sources, each with tax implications. Social Security, retirement account withdrawals, pensions, and investment income all play by different rules in the eyes of the IRS.

One of the most significant changes? How your hard-earned money gets taxed. And it only complicates matters that tax policy is undergoing notable changes in 2025 at both federal and state levels, with potentially significant implications for retirees.

Here’s more of what you need to know.

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Retirement tax changes 2025

At the federal level, as it does each year, the IRS has introduced inflation adjustments for several important credit and deduction amounts. That includes an increase to the extra standard deduction for those 65 and older.

For returns you’ll file in early 2026, the additional standard deduction for single filers increases to $2,000 (that’s a slight increase from the $1,950 for the 2024 tax year.)
For those married filing jointly or separately, it's $1,600 up slightly from $1,550 from 2024.

For more information, see The Extra Standard Deduction for Those 65 and Older.

Additionally, thanks to the SECURE 2.0 Act individuals age 60 to 63 can now make so-called super catch-up contributions of up to $11,250. This is designed to bolster retirement savings during the later years of some individuals’ careers.

At the state level, there is a growing trend to reform taxes on Social Security benefits to attract and retain retirees. For instance, West Virginia is phasing out its taxation of Social Security income, with full exemption slated for 2026, while Colorado has expanded its tax exemption for residents age 55-64. However, the broader implications are complex.

While the changes may provide immediate financial relief for many retirees, they could reduce state revenues and impact funding for public services that benefit all residents. Similarly, federal tax changes, including any proposals to end taxes on Social Security, will influence long-term fiscal policy as lawmakers try to balance tax relief with concerns about Social Security solvency and rising national debt.

How is retirement income taxed?

Given those issues, it’s more important than ever to understand how the IRS (and, in some cases, your state) taxes retirement income. Here’s a summary to get you started, beginning with Social Security.

Many retirees are surprised that up to 85% of Social Security benefits might be subject to federal income tax. The key is understanding your combined income (sometimes called provisional income), the calculation that determines how much your benefits are taxable.

(Combined income is your adjusted gross income plus nontaxable interest and half of your Social Security benefits from the year.)

According to the IRS, your benefits may be taxable if the total of your combined income is greater than the base amount for your filing status.

For more information, see How to Calculate Taxes on Your Social Security Benefits.

Is life insurance taxable?

What about life insurance proceeds? Those are generally not subject to tax when received as a beneficiary. However, surrendering a policy for cash may have tax implications.

How RMDs are taxed

Next up: retirement accounts. For some, traditional IRAs and 401(k)s have been companions throughout their working years, offering tax-deferred growth. But, in retirement, withdrawals from traditional accounts are taxed as ordinary income.

And don't forget about required minimum distributions (RMDs) starting at age 73. The IRS requires you to draw down these accounts, whether you need the money or not.

On the other hand, Roth IRAs and Roth 401(k)s can be your tax oasis in retirement. Contributions to Roth accounts aren’t tax-deductible.

However, withdrawals after five years following the first contribution are tax-free for Roth IRAs, including gains. (Withdrawals before age 59 ½ are subject to a tax penalty.)

Are pensions taxed?

Pensions and annuities generally join the ranks of taxable income, though the specifics can vary. If you made after-tax contributions, a portion of your payments might be tax-free.

Investment income outside of retirement accounts follows its own rules. Interest is usually taxed as ordinary income, but qualified dividends and long-term capital gains enjoy preferential tax rates. Don't overlook the potential tax advantages of municipal bonds, whose interest is often exempt from federal (and sometimes state) taxes.

State retirement taxes

Speaking of states, it's equally important to consider state taxes in your retirement planning. Some states are more tax-friendly to retirees than others, exempting certain types of retirement income or offering other tax breaks.

As of 2025, thirteen states don't tax retirement income. Of those, the following nine have no individual state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. That makes them attractive places for some retirees looking to minimize their tax burden.

What is considered nontaxable income?

And more good news? The IRS generally doesn't tax several types of income, including but not limited to Veterans benefits, child support payments, welfare benefits, workers' compensation, foster care payments, certain insurance payouts, inheritances, disaster relief grants, and Supplemental Security Income (SSi).

For more information, see Types of Income the IRS Doesn’t Tax.

Retirement taxes: Bottom line

So, how do you navigate this complex tax landscape? The key is strategic planning. Consider diversifying your income sources for flexibility in managing your tax liability.

Be thoughtful about when you claim Social Security benefits, considering your immediate needs and long-term tax implications.
Remember, tax efficiency in retirement isn't just about minimizing your tax bill in any given year. It's about optimizing your tax situation over the long haul to make your savings last.
That might mean intentionally realizing more taxable income in some years to avoid higher tax bills later.

With careful planning, you can keep more of your hard-earned money working for you rather than going to the IRS. And yes, as with all financial matters, individual situations vary widely. Consult a qualified tax professional or financial adviser to develop a strategy tailored to your circumstances.

By taking a proactive approach to tax planning in retirement, you can help ensure that your “golden years” are truly golden, with less stress about taxes and more focus on enjoying the life you've worked hard to achieve.

Note: This item appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

This article has been updated to include information regarding the current state of affairs with retirement taxes.

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.