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Protect Retirement Income With Tax Planning

Did you have a Tax ATTACK?

April 15 was startling for many when they got their tax bills.

If you are a high earner or had a good year in the stock market, you probably saw a significant increase in your tax bill, thanks to new tax brackets, a higher top rate for capital gains, Medicare tax increases and the return of the phase out of itemized deductions and personal exemptions.

Tax planning is often the most neglected portion of the financial planning process. It requires making assumptions and running the numbers. With coordination between you, your advisor and tax preparer, you will most often come out ahead and owe less in taxes for the next year.

Still there are some things you can do on your own. Here are seven ways to get started to avoid an unpleasant surprise and possibly even lower your next tax bill.

1.       Start planning now. The biggest mistake taxpayers make year in and year out is to procrastinate. The longer you wait to plan and implement an effective tax strategy, the more difficult it is to have a significant impact on your tax liability.

2.       Meet with your advisor, discuss your most recent Form 1099 from your investment account and do some planning for the year. This includes using capital losses to offset capital gains, making sure only tax-efficient assets are kept in your taxable account(s) and tax-inefficient assets are kept in your tax-deferred and tax-exempt account(s).

3.       Reduce your alternative minimum tax (AMT) add-backs. If you must have bonds in your taxable account, then consider AMT tax free bonds or bond funds. Ask your employer to reimburse you for business expenses rather than claim them as a miscellaneous tax deduction.

4.       Time your state and local tax deductions if you anticipate being subject to AMT one year but not the next. In the off year, double up your payments. Capital gains can also be a problem. Even though they are taxed at a top rate of only 20 percent, if you have too many, they will trigger more AMT, which just increases your capital gains rate.

5.       If you are living off investment income in retirement, create a plan to manage your withdrawals so the combined taxable withdrawals and tax-free withdrawals meet your income needs while keeping your tax bill to a minimum..

6.       Prevent penalties incurred from the U.S. Internal Revenue Service (IRS) because of inadequate estimated payments, and you didn’t factor in the AMT increase. This is often a concern for the self-employed and retired. Make sure your payments are at least as much as last year.

7.       Be prepared. The IRS has created an AMT assistant calculator- http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Alternative-Minimum-Tax-(AMT)-Assista... to help you assess your exposure. 

Taxes are one consideration of many that you need to factor in your financial planning. It’s just that since most individuals tax bills have risen, the IRS has now made them a bigger part of the equation.


About the Author:
Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 25 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.

Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisers before investing.

Claudia Rosenburg May 12, 2014 at 07:40 PM
I find taxes really confusing. I should probably do more research on taxes so I can make more educated decisions when it comes to planning around taxes. Do you recommend working with tax professionals? Claudia Rosenburg | http://www.landsbergbennett.com/Retirement-Planning.2.htm

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