October 5, 2015 Written By: Mike Hengehold, CPA/PFS MST RICP®
One of the keys to living your Brighter Future™ in retirement is to squeeze as much “after-tax fun” as possible out of your various income sources.
While this result may not seem fair, it is a good example of the opportunities that our tax system creates for tax bracket management which can help maximize income during retirement. The below table displays the probable income tax brackets for 2015 for different types of tax filers. Here is additional information about understanding income tax brackets.
How Do Tax Brackets Work
- Every dollar of taxable income between $0 and $18,450 is taxed at a 10% rate = $1,845
- Every dollar of taxable income between $18,451 and $74,900 is taxed at 15% = $8,467
- Every dollar of taxable income between $74,901 and $151,200 is taxed at 25% = $19,075
- Every dollar of taxable income over $151,200 and up to $230,450 is taxed at 28% = $6,664
- For a total of $36,051 tax owed
- How the various types of income will be taxed
- When to recognize income
- How to manage around income sources that you can’t control
- How and when to take deductions so you can optimize between itemizing and taking the standard deduction
Below are two examples illustrating how to manage tax brackets to pay less tax next April 15th.
- Rearrange your investments to reduce taxable income
- Take less money from retirement accounts
- Realize capital losses to offset capital gains
- For high income earners, make deductible contributions to retirement plans
- Bundle expenses to maximize itemized deductions
- Consider accelerating deductions from future years to reduce current income
- Fund a Roth IRA
- Use low income years to take IRA withdrawals and pay little to no tax
- Consider converting your IRA account, or a portion of it, to a Roth IRA
- Structure your portfolio through proper asset location strategies to generate qualified dividends that may be tax free
- Take enough capital gains that may be received tax free
- Defer deductions to a year when your income may be higher
Keep an eye on your projected Required Minimum Distributions (RMDs)
- Tax Bracket Analyzer™ We will partner with your tax preparer to help you manage the recognition of your controllable income to improve your tax efficiency.
- Tax Loss Harvesting System™ We will review your investment portfolio to determine whether or not there is an opportunity to reduce your tax liability by realizing losses on specific investments.
- Tax Location Matrix™ Different tax environments generate different tax burdens on the same level of income. We help you properly locate your assets to ensure they are generating income or are invested in a manner that generates tax efficient after-tax returns.
Remember, it's not what you make that counts, it is how much you keep that matters!
Written by: Mike Hengehold, president of the Cincinnati retirement and financial planning firm, Hengehold Capital Management.
Content in this article is not intended to be financial advice. Instead, we think of it as educational, and financial education is important to us.