Your Retirement Tax Return, Built Before You Retire

Taxes in Retirement

Ask ten pre-retirees what their taxes will be in retirement and you'll get ten versions of "lower, probably?"

Probably. That word is doing a lot of work in a lot of retirement plans.

So today, let's actually build the tax return. A mock 1040 for a hypothetical Round Rock couple, both 67, fully retired, filing jointly in 2026. (Invented for this newsletter, not real clients.) You can follow along with your own numbers, and by the end, "probably" becomes a number.

The income they're living on

$46,000 in combined Social Security ($3,833/month). $48,000 in withdrawals from Traditional IRAs. $12,000 in dividends and interest from a brokerage account ($9,000 of it qualified dividends). $14,000 pulled from a Roth IRA for a trip and a new HVAC.

Total cash into the checking account: $120,000. Now let's see what the IRS considers income, because it is NOT $120,000.

Line by line

The Roth money: invisible. That $14,000 appears nowhere on the return. No line, no tax, no effect on anything else. Remember it, because "no effect on anything else" is the superpower here.

The IRA withdrawals: fully taxable. All $48,000 lands as ordinary income. Every Traditional dollar was tax-deferred, not tax-free. This is the deferral bill coming due.

Dividends and interest: split treatment. The $3,000 of interest is ordinary income. The $9,000 of qualified dividends gets capital gains rates, which for this couple will be 0% (more below).

Social Security: the formula nobody can do in their head. Provisional income = AGI-ish income ($51,000) plus half of Social Security ($23,000) = $74,000. That's past the $44,000 upper threshold, so a big chunk of their benefits become taxable. Run the actual worksheet and roughly $32,000 of their $46,000 in benefits is taxable. Not all of it. Never more than 85% of it. But far from none of it.

Taxable income before deductions: $48,000 (IRA) + $3,000 (interest) + $9,000 (dividends) + $32,000 (taxable Social Security) = $92,000.

Now subtract the deductions. Standard deduction for a couple: $32,200. Both are 65+, add the age extras (about $3,300). Then the new senior deduction: $6,000 each, $12,000 total, fully available since they're under the income phase-out. Total deductions: roughly $47,500.

Taxable income: about $44,500.

What they actually owe

The $9,000 of qualified dividends peels off first and gets capital gains treatment. At $44,500 of taxable income, this couple is UNDER the roughly $98K threshold where the 0% capital gains rate ends for couples. Their dividends are taxed at exactly zero.

The remaining ~$35,500 runs through the ordinary brackets: 10% on the first chunk, 12% on the rest. Federal bill: roughly $3,900.

Texas: $0. As always.

So: $120,000 of spending money. About $3,900 of total tax. An effective rate of 3.25%.

Read that again, because it's the whole point in one line: this couple engineered a 3% tax rate not by earning less, but by choosing WHICH accounts the money came from. All $120K from Traditional IRAs instead? Taxable Social Security maxes out, the torpedo fires, the senior deduction starts phasing, and the bill roughly quadruples. Same spending. Same couple. Different lines on the form.

Build yours tonight

Grab last year's 1040 and a blank sheet. Write down your four retirement income sources: Social Security estimate (ssa.gov), planned Traditional withdrawals, expected dividends and interest (your brokerage's year-end tax form has it), planned Roth or cash withdrawals. Run the same order we just did: provisional income first, then the Social Security worksheet, then deductions, then split the qualified dividends out.

Is it fiddly? A little. It's also one evening, and it converts the vaguest anxiety in retirement ("what about taxes?") into a number you can plan around. Two-thirds of your peers have never built a retirement budget. The share who've built a retirement TAX return rounds to zero. Be the exception.

And if your mock return spits out a big number, that's not bad news. That's the Golden Window telling you there's still time to change which lines your money lands on.