MYTH: Tax Planning is Necessary Only if You're Rich

Myth: Tax Planning is Necessary Only if You're Rich

Perhaps you, too, consider tax planning as something only “rich” retirees need to worry about – and although you’re working on it, you are not there just yet. Or maybe you think that because your retirement income will be lower than what you’re earning today, your tax bill will automatically decrease.

I must admit that, on the surface, that reasoning seems pretty logical. However, in reality these are complete myths when it comes to the way things work under the U.S. Tax Code. Really!

In fact, as tax season shifts into high gear, all you'll have to do is to pay close attention and you’ll notice that the bulk of retirees who feel clobbered by taxes do not consider themselves to be “rich” – although that’s admittedly a very loose term. Take social security benefits, for instance. Your checks begin to be taxable when your total taxable retirement income from all sources (including exempt municipal bonds) plus one-half of your social security benefits exceeds just $25,000 if you’re single or $32,000 if you’re married. You wouldn’t consider these to be thresholds that only the “rich” would be wise to plan around, would you?   

Yes, it’s true that our tax system is progressive in nature. But as I systematically lay out in my book 5 Mistakes Your Financial Advisor Is Making,  it’s equally true that your tax bill depends on your taxable income, not merely your gross or total income. As a result, even with a significant drop in your gross income, you could end up effectively paying more in taxes during retirement, as you generally tend to lose most of your significant deductions: mortgage interest (because your house is usually paid off or nearly so), dependent children (they are likely independent adults by the time you retire), and deductible contributions to retirement accounts (you’re drawing income, instead of contributing).  

On the other hand, the Tax Code also identifies some sources of retirement income as non-taxable. What you must understand about non-taxable income is that its size is irrelevant when it comes to your income tax bill. As a result, if Mary draws $250,000/year in non-taxable income, she’ll not owe even a penny of tax. All things being equal, Sarah, who draws just $30,000 in taxable income, will end up paying more in income tax. So we can say that when it comes to taxes, the term “rich” is directly related to taxable or non-taxable income.

Now it's time for some good news: Even if you are already retired, there are things you may be able to do to shift your income from the taxable column into the non-taxable column today – and also protect your income from possible future tax hikes. You can begin by scheduling a complementary, no-obligation appointment to talk with a Laser Financial Group wealth advisor about your options. 

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Want to talk with an experienced financial professional with dozens of real-world clients who are experiencing successful retirements? Want to learn how you can KEEP more of your retirement money, even if the market crashes? Call 877.656.9111 or visit LaserFG.com to talk with a retirement professional with a proven track record TODAY!