Tax Planning vs. Tax Prep.
CPAs are great at gathering your documents, filing appropriately, and using available deductions to minimize your taxes for the year. In contrast, Tax Planning means looking ahead to minimize your lifetime tax bill.
In short, I am not a CPA — I do not file your tax return or represent you to the IRS — but I can partner with your CPA to make sure we are making smart tax decisions for you now and in the future.
Your tax liability in retirement is influenced by various factors, including your filing status, retirement income sources, and total annual income.
Here are four taxes to consider and how they can affect your federal and state tax brackets during retirement:
Taxes on Retirement Account Withdrawals
Withdrawals from retirement accounts have varying tax treatments. Traditional IRAs and 401(k)s, funded with pre-tax dollars, are subject to federal and state income taxes based on your tax bracket. In contrast, Roth IRAs and Roth 401(k)s, funded with after-tax dollars, offer tax-free withdrawals under certain conditions.
Social Security Taxes
Additional retirement income sources combined with Social Security benefits can trigger income taxes on your Social Security benefits. The tax liability depends on your provisional income, which includes a portion of your Social Security benefits, adjusted gross income (AGI), and tax-exempt interest income.
Taxes on Investment Income
Long-term realized investment gains and qualified dividends are taxed at the current capital gains rate, potentially with an additional 3.8% net investment income tax for higher earners. Interest income is generally taxed at ordinary income tax rates, and state income tax on investment income varies.
Medicare Premiums
Additionally, I take a comprehensive approach to financial planning by considering how your retirement income can impact Medicare Part B and Part D premiums. The income-related monthly adjustment amount (IRMAA) can trigger premium surcharges for higher earners, resulting in significant costs during retirement. By engaging in proper annual tax planning in the years leading up to and after retirement, you can help mitigate these costs and prevent any unwelcome surprises.