“The only two things that scare me are God and the IRS” –Dr. Dre

Assuming that you do not define patriotism by the amount you pay in tax, what follows should be useful.

If you’re one of the 53% of Americans who pay federal income taxes, then it is likely you pay more than what is legally required.  If you own a small business, then it’s almost a certainty you are over paying.

The Seven Most Expensive Words in the English Language:  My CPA takes care of my taxes.

From our experience, most CPAs do a great job of filing taxes; but very few actually do any tax real planning.  When I ask people, when was the last time their CPA said he found a way to lower your taxes by $4,000, they usually give me a blank stare and then say, “Never.”

Does your CPA/Tax Preparer ever:

• Call you with proactive strategies to achieve a tax free retirement?

• Demonstrate how to restructure your 401k/403b/IRA accounts to avoid future taxation?

• How to collect your social security benefits TAX FREE?

• Show you how to structure your business to minimize employment taxes?

• Show you how to write off your family’s medical bills as a business expense?

• Show you how you can hire children (or grandchildren) to shift income from yourself to them?

• Help you choose the right retirement plan for your business?

• Explain how each of your investments is taxed and make suggestions on how to reduce it?

• Advise you on how to carefully consider which investments belong in taxable accounts and which investments belong in tax-advantaged accounts?

• Meet with you throughout the year to discuss your business–or does he just wait until taxes are due?

• Give you a plan for minimizing taxes–or does he/she just wing it every year?

Aside from investing behavior, income taxes are the greatest obstacle to most investors.  There is never an age at which you stop paying them.  You paid tax on your social security as you put money into the system, and you will likely pay tax on the money as it comes out.

When you reach age 70.5, you must start paying tax on your retirement plans (401k, IRA, 403b).  When you die, your heirs must also pay tax on whatever is left.

Your estate may be taxed again for simply being too big.

The code is, by design, very complicated.   Too often, people just go along with it, unaware of the steps that can legally reduce their federal and state income taxes.  This is especially important during retirement.

You have a choice of paying taxes now…or later.  To many, procrastination seems logical when it comes paying the IRS.  For years people have socked away massive amounts of money in 401ks, 403bs, IRAs.  The idea is you invest it now in a tax deductible/tax deferred account while you’re in a high tax bracket.  Then you withdraw it at a lower tax bracket when you retire.  Or so you hope.

What if taxes rise in the future?  Our country, as of 2016, owes close to $20 trillion.  Projections suggest this amount will continue to rise as more and more baby boomers retire.  Fewer people paying taxes and more requiring things like Medicare, Medicaid, and Social Security.

Since income taxes began in the early 1900’s, the average top marginal rate is 62%.  Today it’s 39.6%.  We’ve had much higher taxes in the past.  We should be prepared for them to return in the future.

 Case Study

Bill & Karen Tucker are both 65.  Retired, Bill has a rollover IRA worth $600,000.  Bill collects $2,200 a month from social security. Karen receives $1,800.

They need $7,000 a month to live comfortably, so they withdraw $3,000 a month from their retirement accounts.

To determine how much of their social security check is subject to taxation, we add the IRA withdrawals ($36,000) to one-half of the social security payments ($24,000)

This gives them a modified adjust gross income (MAGI) of $60,000.  Whenever the MAGI exceeds $44,000 for a married couple, then up to 85% of their check is subjected to taxation.

Assuming they file jointly and use the standard deduction, Bill & Karen owe about $4,000 in Federal income taxes.  Within that amount is a tax assessed to almost half of their Social Security benefits.

Now, what if they had decided a few years back to convert their rollover IRAs to a Roth IRA?  Doing so would have triggered tax at the time of conversion, but no tax would ever be owed on the accounts again.  Even if their accounts double in value, there is no tax associated with a Roth withdrawal.

Not only is there no tax on Roth IRA withdrawals, but now there would also be no tax owed on their Social Security benefits.  Furthermore, Bill & Karen could still withdraw about $23,000 from their taxable IRA and still pay $0 in tax since they still have their standard deduction and exemption to apply against these “taxable” earnings.

Imagine if federal income tax rates double in the future.  By converting to a Roth, the Tucker’s have protected themselves.

Another tax advantaged/tax free vehicle is permanent life insurance.  Money in the policy grows tax deferred and can be accessed tax free via a policy loan or withdrawal.  While we don’t usually recommend retirees buy life insurance, this feature is a great reason to keep your policy even after you’ve stopped working.  In addition, many new policies today allow you to apply a portion of the death benefit toward long term care costs.

Like a lot of people we meet, the Tuckers rely solely on their accountant for tax advice.  But from our experience, many accountants work as tax filers, not tax planners.

Tax planning is one of the most ignored areas of financial planning, and failure to address the IRS lien on savings is ruining people.  It is not the job of the IRS to tell you how to lower your taxes.  It’s your job.  If you don’t know how, you need to find a professional who does.  You won’t find him inside a box of turbo tax software.

The tax code is very complicated.  Too often people just go along with it, unaware of the steps that can legally reduce their federal and state income taxes.  Failure to address this issue can mean you’re not worth anywhere close to what you may think.

If you want to know more about real tax planning, call us at 513-563-PLAN (7526).  Or, sign up for one of our webinars called Defusing the Ticking Tax Time Bomb by Clicking Here.