The Tax Road Map that is generated can help families see where the planning opportunities exist.
The goal of creating a Tax Road Map is to:
1. Identify immediate tax planning strategies for 2020.
2. Look for ways to benefit loved ones as part of a legacy plan.
3. Discuss how required minimum distributions work.
4. Talk about opportunities for those charitable minded.
5. Plan for ways to reduce or eliminate the taxes on Social Security benefits.
The unexpected impact of retirement taxes in the U.S. tax system may seem simple in theory but is actually quite complex. There are different types of interactions between different types of taxable income. Some income isn’t taxable except in the presence of other income, deductions, exemptions, credits, phase-outs, and surtaxes. All create a tax landscape that can be difficult to proactively navigate. One method for identifying opportunities for strategic tax decisions is to focus not on the “bracket” but instead on your effective marginal tax rate (EMR). The EMR can be simply defined as the amount you actually lose to federal income tax on the next dollar of income. The EMR can surprise many people, with one of the most significant examples being the so-called “tax torpedo,” in which a taxpayer in the 12% bracket can experience a 49.95% EMR. The gray in the graph below illustrates how different your EMR may be from your bracket rate.
We use software to provide a landscape view of your tax situation, which may allow us to suggest alternate patterns of withdrawal or contribution to retirement accounts like 401(k)s, IRAs, or Roth IRAs. We can also help you understand when it may be beneficial to consider Roth conversions or harvest a capital gain or capital loss in your taxable accounts. Although we do not provide tax advice, this strategic tax consulting can help you and your tax advisor proactively identify opportunities to save on taxes throughout retirement.
Keep in mind, the complexity of your individual income tax situation and someone’s ability to manage it depends on the types and sources of your income. As you can see below, there are multiple types of income and income tax brackets. What bracket you’re in depends on the types of income, your filing status, your level of income, and whether that income is countable and taxable for the purposes of determining just how much of your Social Security benefit is taxable.