Why are we talking taxes on today’s episode, when the 2022 tax season is already over? Because taxes are a constantly evolving part of a comprehensive financial plan. The rules around tax planning and retirement change. Your taxable income changes. And, most importantly, your life changes.
Today, we discuss some of the tax items on our checklist-driven planning process at Keen Wealth that keep every part of a financial plan in sync throughout the year.
1. Marginal tax rates
Occasionally we will talk with folks who are changing jobs or transitioning into retirement and are worried that earning more money is going to push them into a higher tax bracket. It’s important to remember that federal tax brackets aren’t cliffs you fall over if you earn a dollar past the threshold. Your income is taxed at marginal rates. This means that your taxes will only rise when there is an increase in your taxable income.
For example, for a married filer in 2022, the first $0-$22,000 of your taxable income will always be taxed at a marginal tax rate of 10%. The next dollar that couple earns will be taxed at 12%, and so on up to the highest marginal bracket of 37%.
By monitoring how someone’s marginal tax rates could fluctuate year to year, we are able to identify potential opportunities for things like Roth IRA conversions or taking larger capital gains from investment accounts. And we can also advise folks on the best tax planning strategies associated with a big career change or taking Social Security early.
2. Average tax rates
This is your total tax paid (state and federal) divided by your total income. From a planning perspective, this number can help folks get a clearer picture of how much money they really have to work with in a given year.
That perspective can be especially important for new retirees who are adjusting to life without that monthly paycheck. If we were to run a quick back-of-the-napkin calculation for a 70-year-old retired couple earning $100,000 and taking the standard deduction ($27,700) in 2023, your average tax rate might only be around 11%. For some folks, that average tax rate is going to provide some welcome peace of mind that helps them enjoy retirement more. For others, it might be a wake-up call to scale back some expectations, or at least be a little more intentional about their retirement spending plan.
3. Capital gains and carry forward losses.
You are allowed to use losses from the sale of a stock against your annual realized gains to reduce your tax burden. But if your realized losses are more than your realized gains in a given year, the tax code allows you to carry forward your losses into future years to reduce your future tax liability indefinitely, up to $3,000 per year.
One common way to take advantage of these rules during years when the markets are down is to sell stocks in non-retirement brokerage accounts, buy a similar stock, and lock in that loss. That gives advisors an opportunity to rebalance the portfolio and maintain flexibility against future gains.
Your total capital gains also present important planning opportunities. Short-term gains are taxed at the same rate as the rest of your income. Long-term gains on assets held for more than a year are taxed at lower, preferential rates – potentially as low as 0% depending on your overall income level. In a given year, it might be beneficial to sell a security and trigger a capital gain because you won’t be taxed on the profit. Or, in a low-tax year, you might want to harvest a capital gain and reinvest it to reset your cost basis.
4. Income Related Monthly Adjustment Amounts (IRMAA)
IRMAA is not your friend if you’re retired. IRMAA is a surcharge based on your income that’s added to your monthly Medicare premium, based on your tax returns from two years ago. Unlike marginal tax rates, IRMAA surcharges are set up as cliffs: the first cliff begins at $97,000 for individuals and $194,000 for couples in 2023. Earn one dollar more and your Medicare premiums go up.
But a lot can change in two years! If the IRS is basing your IRMAA on a year when your income was much higher than usual, you can appeal the surcharge.
Keen Wealth’s checklist-driven process can help folks stay ahead of these kinds of surprises in retirement. No matter what time of the year it is, we’re always ready to answer your tax questions and start planning a better blueprint for retirement.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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