01 Apr 2025

Please Sir! I Want to Keep More of What I Have: Focus on Senior Citizen Taxation (State and Federal)

As the population ages and more taxpayers live on fixed incomes, both federal and state governments face challenges in determining the appropriate level of taxation for retirees. For federal income tax purposes, retirement income is generally fully includable in a taxpayer's income, except for the portion representing a return of basis (after-tax contributions and Roth contributions/earnings). Social Security benefits are taxable under federal law to a certain extent for most. However, many states modify the taxability of retirement benefits. States and localities frequently enact property tax relief measures too. These may include exemptions, credits, and abatements for senior taxpayers. See this state law survey for more information.

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    Reference this practice note discussing payroll tax withholding which helps fund Social Security benefits. Putting Medicare aside, the Old-Age Survivors and Disability Insurance (OASDI) element of Social Security/FICA requires a 6.2% withholding tax up to that year’s indexed taxable wage limit ($176,100 for 2025 wages). Employers are obligated to make a matching payment and deposit both amounts with the IRS. For an employee earning $200,000 in 2025, their Social Security withholding will be $10,918.20. An annual total of $21,836.40 would be deposited with the IRS for the employer and employee payments combined. Consider: An individual earning at least the taxable wage base for 40 years can expect a Social Security benefit of about $3,700 or more monthly, roughly $44,000 yearly. The present value of that income stream (for a 25-year period, at a 4% interest rate, compounded monthly), is about $700,000.
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