Taxable vs. Exempt Income: What Seniors Need to Know for a Hassle-Free Filing (2025 Tax Year Guide)

Common TAXABLE Income Sources for Seniors

The IRS general rule is that all income is taxable unless a specific law excludes it. For most retirees, taxable income will come from these common sources:

Pensions, Annuities, and Traditional Retirement Plan Withdrawals

If you contributed to your retirement account with pre-tax money (like a traditional 401(k) or a deductible IRA), the distributions you receive in retirement are considered ordinary taxable income. This includes Required Minimum Distributions (RMDs), which you must start taking at age 73.

Wages and Self-Employment Income

For the millions of seniors who continue to work part-time or run a small business, this income is fully taxable, just as it was before retirement. This includes salaries, wages, tips, and net income from self-employment.

Investment Income

Income generated from your investments is typically taxable. This includes:

• Interest Income: From bank accounts, CDs, and bonds.
• Dividends: Payments from stocks you own.
• Capital Gains: Profits from selling an asset like a stock or property for more than you paid for it.

The Big Question: Is My Social Security Income Taxable?

This is one of the most confusing topics for new retirees. The answer is: it depends on your total income. The IRS uses a calculation based on your “provisional income” to determine if 0%, 50%, or up to 85% of your Social Security benefits are subject to federal income tax.

Based on that total for the 2025 tax year, here are the general thresholds:

• Single Filers:
  • If your provisional income is between $25,000 and $34,000, up to 50% of your benefits may be taxable.
  • If it’s over $34,000, up to 85% may be taxable.
• Married Filing Jointly:
  • If your provisional income is between $32,000 and $44,000, up to 50% of your benefits may be taxable.
  • If it’s over $44,000, up to 85% may be taxable.

Common EXEMPT (Non-Taxable) Income Sources for Seniors

Now for the good news! Many common sources of funds for seniors are specifically excluded from taxable income by law.

Roth IRA and Roth 401(k) Qualified Distributions

This is a major benefit of Roth accounts. Since you funded them with after-tax dollars, your qualified distributions in retirement are 100% tax-free. This can be a powerful tool for managing your overall taxable income.

Gifts and Inheritances

In almost all cases, cash or property you receive as a gift or an inheritance from a loved one is not considered taxable income to you, the recipient.

Life Insurance Proceeds

If you are the beneficiary of a life insurance policy, the death benefit you receive is generally not subject to income tax.

Reverse Mortgage Payments

The money you receive from a reverse mortgage is treated as a loan advance, not income. Therefore, these payments are not taxable and do not affect the calculation for your Social Security benefits’ taxability.

Other Tax-Exempt Sources

Other non-taxable income sources can include veterans’ disability benefits, certain disability insurance payments (if premiums were paid with after-tax dollars), and federal income tax refunds.