Retirement doesn’t simplify your taxes. For a lot of people, it makes them harder.
You leave the workforce. Automatic withholding stops. Now you’re managing multiple income streams, each with its own rules: Social Security, IRA withdrawals, required minimum distributions, pensions, maybe some consulting work on the side. Miss one withholding adjustment, and the IRS sends you a bill in April that you weren’t planning for.
At Precision Tax Relief, this is one of the more common situations we see: retirees who handled their finances carefully and still ended up owing. The debt usually isn’t from carelessness. It’s from complexity that nobody explained clearly before retirement.
Here’s what’s actually driving it in 2026.
How Social Security Gets Taxed
Most people retire assuming Social Security benefits are tax-free. They’re often not. The IRS calculates what it calls “combined income” to figure out how much of your benefits are taxable. That’s your adjusted gross income, plus nontaxable interest, plus 50% of your annual Social Security benefits. The thresholds:- $25,000 for single filers: up to 50% of benefits may be taxable
- $34,000 for single filers: up to 85% may be taxable
- $32,000 for married filing jointly: up to 50%
- $44,000 for married filing jointly: up to 85%
The RMD Problem
Under SECURE 2.0, the IRS requires you to start taking minimum distributions from traditional IRAs, 401(k)s, SEP IRAs, and similar tax-deferred accounts at age 73 if you were born between 1951 and 1959, or age 75 if you were born in 1960 or later. These are required minimum distributions, or RMDs. The amount is calculated by dividing your December 31 account balance from the prior year by an IRS life expectancy factor. For a 75-year-old with $500,000 in an IRA, that works out to roughly $20,325 ($500,000 divided by the IRS factor of 24.6). That full withdrawal counts as ordinary income. A few situations make this worse than people expect.- The two-RMDs-in-one-year trap: The IRS lets you delay your first RMD until April 1 of the year after you reach your RMD starting age. If you take that delay, you’ll owe a second RMD by December 31 of that same year. Two full taxable distributions in one calendar year. That can push your combined income well above the Social Security taxation thresholds and trigger higher Medicare premiums on top of the extra tax.
- A missed RMD: If you don’t take the full distribution by the deadline, the IRS charges a 25% excise tax on the shortfall. Under SECURE 2.0, that drops to 10% if you correct the mistake within the correction window and file Form 5329. You still have to catch it.
- Multiple accounts: Each IRA or 401(k) has its own RMD. Many retirees consolidate accounts specifically to reduce the chance of missing one.
Withholding Gaps
Your paycheck had automatic federal withholding. Retirement income mostly doesn’t. Pension payments and IRA distributions do have default withholding options, but the defaults are often conservative or set at zero. Many people leave account withholding at whatever was set when they first started taking distributions and never revisit it. To adjust withholding on pension or annuity payments, you file Form W-4P with your payer. If you’ve never done that, you may be underwithholding every month without knowing it. Social Security works the same way. You can ask the Social Security Administration to withhold federal tax directly from your monthly payment at 7%, 10%, 12%, or 22%. If you don’t request it, nothing is withheld. Many retirees find themselves making quarterly estimated tax payments for the first time. IRS underpayment penalties apply when you owe more than $1,000 at filing and haven’t paid enough during the year.The Widow’s Penalty
When a spouse dies, the surviving spouse loses married filing jointly status after the year of death. They file as single, which means a smaller standard deduction and compressed tax brackets on the same income. The income itself often doesn’t change much. The Social Security, the pension, the RMDs all keep coming. But the tax on that income rises because single filers hit higher rates at lower income levels. We covered this in detail in our post on the widow’s penalty. If you’ve recently lost a spouse, it’s worth reading before your next filing.Irregular Income: Consulting, Capital Gains, Inherited Accounts
Retirement income isn’t always predictable. Part-time consulting, a sold vacation property, liquidated investments, an inherited IRA: all of these create taxable income, and none automatically withhold federal tax. A home sale generates a capital gain. A stock sale produces ordinary or long-term capital gain income depending on the holding period. An inherited IRA comes with mandatory distributions under the 10-year rule from the SECURE Act. Brokerage dividends are reportable even if you didn’t sell anything. These one-off income events don’t fit a standard withholding schedule. If your estimated payments don’t account for them, you end up with a year-end balance.What the One Big Beautiful Bill Act Changed for Retirees
Congress passed the One Big Beautiful Bill Act in 2025 with a direct benefit for older taxpayers: the senior bonus deduction. Taxpayers 65 and older can claim an additional $6,000 deduction ($12,000 for couples where both spouses are 65 or older), on top of the existing extra standard deduction for seniors. The full deduction is available if your modified AGI is below $75,000 for single filers or $150,000 for joint filers. Above those thresholds, the deduction phases out at 6 cents per dollar of excess income, disappearing entirely at $175,000 for single filers and $250,000 for joint filers. It’s available for tax years 2025 through 2028. For some retirees, this keeps combined income below the Social Security taxation thresholds or reduces how much falls into higher brackets. It’s not applied automatically, though. You have to claim it and meet the income requirements.If You Already Owe: Resolution Options for Retirees
Which path makes sense depends on your income, assets, and the size of the debt.- IRS payment plan: The most common resolution. You pay the balance in monthly installments. Interest and penalties keep accruing, but the IRS won’t levy your accounts while you’re current on the plan. For retirees on fixed incomes, the payment can often be structured to fit. IRS payment plan details here.
- Currently Not Collectible (CNC) status: If your income doesn’t cover basic living expenses after IRS Collection Financial Standards are applied, you may qualify for CNC. The IRS pauses collection activity: no levies, no garnishments. The debt doesn’t disappear and interest keeps running, but for retirees with limited fixed income, CNC can provide real breathing room while the 10-year collection statute winds down. IRS hardship status details here.
- Offer in Compromise: If the IRS calculates that what it can realistically collect from you is less than the full balance, you may be able to settle for less. Retirees with modest income and limited assets sometimes have a low “reasonable collection potential” that supports an OIC. Acceptance rates historically run around 30 to 40%. A consultation will tell you whether your numbers support an application. Offer in Compromise details here.
- Penalty abatement: A clean compliance record for the prior 3 years can qualify you for First Time Abatement, which removes failure-to-file or failure-to-pay penalties. Abatement doesn’t reduce the underlying tax, but penalties can make up a large share of the total balance. Penalty abatement details here.
Frequently Asked Questions
Is Social Security taxed by the IRS?
It depends on your combined income. Single filers with combined income above $34,000 may owe tax on up to 85% of benefits. For joint filers, that threshold is $44,000. Combined income is your AGI plus nontaxable interest plus 50% of your annual Social Security. Pension income, IRA withdrawals, and dividends all count toward that calculation.
What happens if I miss a required minimum distribution?
The IRS charges a 25% excise tax on the amount not withdrawn. Under SECURE 2.0, that drops to 10% if you correct it within the correction window and file Form 5329. The missed amount doesn’t carry forward either; it doesn’t reduce future RMD obligations.
Can the IRS garnish Social Security benefits for back taxes?
Yes. Through the Federal Payment Levy Program, the IRS can take up to 15% of your monthly Social Security benefit. No court judgment is required. More on IRS Social Security garnishment here.
Does missing a payment affect a federal tax lien?
A default doesn’t automatically create a new lien. But if you already have a federal tax lien on file and the agreement terminates, the IRS has no reason to hold off on enforcement anymore, and that lien becomes active faster than you’d like.
Can retirees qualify for an Offer in Compromise?
Some can. The IRS looks at your reasonable collection potential: income, expenses, and asset equity. Retirees with limited income and few assets sometimes have a low enough collection potential to support an OIC. Get a professional assessment before applying; a rejected offer delays other options.