Do all forms of income count towards my standard deduction? Need clarity for retirement planning

I'm trying to plan ahead for retirement and getting confused about how income and standard deductions work. In the first few years after I retire, my plan is to live off my savings so I won't need to sell any stocks. This means my only income sources will be from interest payments and dividends. If I make sure the total amount I receive from interest + dividends stays below the standard deduction threshold (which I think is around $13,850 for single filers), would I essentially pay zero federal income tax? Or am I missing something important here? Do interest and dividend incomes get treated differently than regular income when it comes to the standard deduction? Sorry if this is a basic question, but I want to make sure my retirement strategy is solid and I'm not overlooking something that could mess up my tax planning. Thanks for any insights!

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18 comments

Carmen Lopez

•8M

So the standard deduction doesn't exactly work that way. The standard deduction is subtracted from your total income to determine your taxable income - it's not a threshold you stay under. The good news is that your thinking is actually on the right track! If your total income (including interest and dividends) is less than your standard deduction, then you would indeed have zero taxable income, which means no federal income tax. For 2025, the standard deduction for single filers is projected to be around $14,600. Just be aware that certain types of dividends (qualified dividends) are actually taxed differently - they get preferential capital gains tax rates. But the standard deduction still applies to them first. Also, don't forget about required minimum distributions (RMDs) from retirement accounts once you reach the required age, as those will count as taxable income too.

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Carmen Lopez

•8M

You're absolutely right about Social Security. Only a portion of your Social Security benefits may be taxable, depending on your "combined income" (adjusted gross income + nontaxable interest + half of your Social Security benefits). If your combined income is between $25,000 and $34,000 for single filers, up to 50% of your benefits may be taxable. Above $34,000, up to 85% could be taxable. So if you're receiving Social Security, you'll need to factor this into your calculations, as it could push some of your income into taxable territory even if you're keeping your interest and dividends low.

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•8M

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Giovanni Mancini

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It really depends on your total income needs. If you need more income than the standard deduction would shelter, then municipal bonds become valuable because that portion remains tax-free regardless. For someone who needs, say, $30,000 in annual income, they could take $14,600 from taxable sources (covered by the standard deduction) and the rest from municipal bonds, effectively paying zero federal tax on the full amount. If your income needs are below the standard deduction, then yes, higher-yielding taxable investments make more sense mathematically.

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