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Tax Planning for Your Entire Life

By: Terry Roe
Published in Articles on March 29, 2016

One of the most famous quotations by Benjamin Franklin is: “Nothing is certain except death and taxes.” If you believe this quote to be true, then the financial planning takeaway is that you must continue tax planning until death. Tax planning within the context of financial planning is more than simply trying to avoid paying any taxes; it is trying to maximize the amount of money available to you and your family after taxes. A fundamental principle of income tax planning is to manage income tax brackets by smoothing income over time. While this sounds simple enough, it can prove to be very difficult. The difficulty arises in part from hidden “stealth” taxes and the tax rates applicable to different types of income. In the remainder of this article, I will review in general terms a few tax-planning thoughts I believe are relevant to those approaching retirement soon and those already retired.

  1. Understanding how your Social Security benefit is taxed. The taxation of Social Security benefits is one of the biggest “stealth” taxes impacting retirees. If the only income you have is Social Security, then none of your benefit is taxable. Hopefully, this is not the case, and you have other income. If you have other income, you take half of your Social Security benefit plus all of your other income, and if the sum exceeds $25,000 if single, or $32,000 if married and filing jointly, then a phase-in calculation is made. That means up to 85% of your Social Security benefit is taxable. This phase-in of the taxability of Social Security benefits means that your marginal tax bracket may remain unchanged, but your effective tax rate can increase as the additional income causes more Social Security benefit to be taxable. Because of the unique nature of the taxability of Social Security benefits, the transition period between full-time employment and beginning Social Security benefits can provide some tax-planning opportunities. Tax-planning takeaway: Our office has found that, for some, the time between retirement and beginning Social Security benefits is a great opportunity to execute some traditional IRA to Roth IRA conversions.
  1. Understanding how Traditional IRAs and Roth IRAs are taxed. Traditional IRAs are pre-tax accounts. When distributions are taken from them, the distribution is taxed as ordinary income. Traditional IRAs are also subject to the required minimum distribution (RMD) rules, meaning you must begin taking distributions based upon the IRS life expectancy tables at age 70½. Roth IRAs are after-tax accounts. Distributions from Roth IRAs in retirement are tax-free. You are not required to take any minimum distributions from your Roth IRA. Tax-planning takeaway: Pay attention to your asset allocation and which assets you own in the traditional IRA and which assets are in the Roth IRA.
  1. Understanding how different types of income are taxed. Wages, interest, some dividends, pension, IRA distributions, annuities, rental, self-employment, and Social Security benefits are all taxed at ordinary income tax rates. Some dividends, called qualified dividends, and capital transactions (i.e., the sale of stocks, mutual funds, real estate, etc.) are taxed at the lower capital gain rate. Currently, taxpayers in the 10% or 15% tax brackets for ordinary income are in the 0% tax bracket on qualified dividends and capital gain income. Tax-planning takeaway: Pay attention to what you are investing in. Not all “investment” income is taxed the same (i.e., annuity income = ordinary income).
  1. Understanding how “bunching” your itemized deductions works. The concept of “bunching” itemized deductions means you are going to alternate each year between claiming the standard deduction and itemized deductions on your income tax return. For 2015, the standard deduction for a married couple filing jointly is $12,600. Itemized deductions include medical expenses, property taxes, state income taxes, mortgage interest, charitable contributions, etc. Some taxpayers have enough control over their itemized deductions that they are able to be significantly below the standard deduction amount in one year and then above it in another year, giving rise to the benefit of “bunching.” Tax-planning takeaway: Spending some time now on tax planning can save you money in the future.

The purpose of this article is not to give specific advice, but to highlight the importance of tax planning for your entire life as an integral part of your financial planning for life. I would encourage you to seek out the advice for your individual circumstances from qualified professionals.

Terry L. Roe is a financial advisor with Onyx Financial Advisors, LLC, an independent fee-only registered investment advisory firm located in Idaho Falls, Idaho. He can be reached at (208)522-6400 or at