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Tax-Smart Planning for Retirement Income

HCM Wealth Advisors was built on the principle of “Tax-Smart Planning.” Two of the biggest factors affecting your financial independence are the markets and taxes. We can’t control the markets, but we can help manage your tax bill to let you keep more of the fruit from your life’s labor. By doing this, we aim to build a multi-year tax plan to minimize your lifetime tax obligation. And, while it’s a cliche, it truly is “not what you make that matters, but what you keep”!

 Tax Bracket Management

First, we look at the tax brackets you’re likely to fall into now and in the foreseeable future. There are currently seven tax brackets for Federal Income Tax, structured progressively, ranging from 10% for income below $10,275 ($20,550 for married households filing jointly) up to 37% for income over $539,900 ($647,850 for married filing jointly households). But it does not stop there. After considering local, state, Medicare, investment and additional capital gain taxes, the tax rate for some can exceed 50%.

Our goal, broadly speaking, is to purposefully move your controllable income and deductions between tax years and tax environments to fully utilize the lowest ordinary income brackets available to you while funding the balance of income needs with income from lower bracket environments.

 Protecting Income from Avoidable Taxation

A first step is always getting a feel for one’s tax bill for the current year and making sure appropriate steps are taken to avoid penalties and other IRS problems. The next and more important step is trying to improve the situation. Planning considerations include:

  • Tax-locating investments that allow taking full advantage of lower marginal, capital gain, and qualified income tax rates.
  • Avoiding the 3.8% Net Investment Income Tax.
  • The higher itemized deduction thresholds and state and local tax limits imposed as “tax-simplification” now make it nearly impossible for many taxpayers to gain any tax benefit from deductible expenses they incur, with a prime example being charitable gifts. Learning to bunch deductions into alternating tax years can allow you to cash in on the government’s temporarily generous standard deduction limits in one year and gain a substantial tax benefit from your itemized deductions in the next.
  • As the tax law now stands, 2026 will be a big year. Tax rates are going up and estate tax deductions are coming down. Long-range planning today will allow savvy taxpayers to take advantage of today’s lower rates.

 Retirement Tax Planning

 Also, as people move into retirement, tax situations change and so must their planning. For example:

  • The process by which Social Security is taxed can create a sharp rise and fall in marginal tax rates. This situation, known as the “tax torpedo,” can cause the marginal tax rate for middle-income families to spike to 150% to 185% percent of their normal tax bracket. Income planning and social security claiming decisions can help manage this problem.
  • Required minimum distributions (RMDs) now begin for most taxpayers when they turn 72. Depending on the amount of deferred assets subject to RMDs, a retiree’s tax rate can move substantially higher when these payments begin, entitling Uncle Sam and the Governor to much more of your retirement savings. Beginning to plan for this inevitable situation early can save your family thousands in taxes.
  • Additional taxes are imposed on retirees that slip into Medicare Premium surcharges. In this realm, one dollar of income can cost a couple thousands in additional taxes. These problems can often be managed with careful year-end planning.
  • Retiring workers often see their taxable income change dramatically from their last few working years into their first few years of retirement. Planning is important to capture the full tax benefit of future tax deductions at your highest “working” marginal tax rates (when Uncle Sam shares the most).

 If you would like to take a fresh look at your tax situation, contact your HCM Advisor to schedule a year-end tax review. It is a complimentary service for HCM clients.

Return to October 2022 Newsletter Articles

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