Monday, April 27, 2015

A noteworthy tax lesson: Less Earnings, More Taxes – what NOW??

A noteworthy tax lesson: Less Earnings, More Taxes – what NOW??

April 15, the dreaded day of reckoning for millions of American taxpayers, has come and gone. For Ms. J.R., this year being the third year into her retirement, it was particularly brutal, as her tax bill skyrocketed far beyond anything she could have imagined. What was particularly mind boggling to her was the fact that she’s not making nearly as much income in retirement compared to her working years, and yet her tax bill “keeps going up.” 

To paraphrase her two-minute-plus passionate voice message, “I need to come in and see you right away to look over my stuff because something is not right somewhere.” Her cousin, D.W., who has been our firm’s client for more than six years, suggested she contact me and followed up with a call of her own to stress the urgency of J.R.’s situation.

And, in many ways, I do understand where they are coming from. After all, how many of us wouldn’t think something was terribly wrong when someone who makes more than $32,000 more in income per year than you do, with pretty much the same tax profile in terms of exemptions/deductions, has a lower tax bill than you do? No, that wouldn’t be cool, would it?

I personally returned Ms. J.R.’s call the same afternoon, and we set an appointment for the following morning. Lo and behold, her income is significantly lower than her beloved cousin (by more than $32,000), yet to her surprise and greatest disappointment, I couldn't find anything wrong on her tax return. Of course, she didn’t like that news one bit.

Here’s the simple explanation and the point I hope to drive home for millions of American taxpayers: Although Ms. J.R.’s cousin made significantly more than her, and they both have pretty much the same situation in terms of tax deductions/exemptions, Ms. J.R.’s “taxable” income was much higher than her cousin’s. In other words, although D.W. brought in way more money, most of her income is considered “nontaxable.”

As I explain in great detail in 5 Mistakes Your Financial Advisor Is Making and also in Is Your 401(k) a Trap?, under our tax code, we pay tax only on taxable income. So instead of simply thinking and assuming that because your income might be lower when you retire you’ll automatically have to pay much less in the form of taxes, you’d be wise to work with a financial advisor who knows what he/she is doing to make sure that you are effectively shifting your income from the “taxable” column into the “nontaxable” column of your tax return. This is exactly what we helped D.W. accomplish successfully over the past six or so years.

Of course, Ms. J.R. now wants a plan of her own that will help her turn things around for the better. Who wouldn’t like to keep more of their hard-earned money? The great news is that we can help Ms. J.R. make that essential shift.
If your tax burden is much higher than you think it should be, based on your new income in retirement, contact us so that we can help you to evaluate your current situation and see if you may be able to turn things around. Visit or call 877.656.9111 right now to book your complimentary session.

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