TAXES IN RETIREMENT. Don Kitson Paul Hindelang

Transcription

1 TAXES IN RETIREMENT Don Kitson Paul Hindelang

2 Disclosures: This is an educational workshop There will be NO discussion of specific products/services. The Presenter is in no way employed by, affiliated with, or endorsed by the IRS, the Social Security Administration or any other government agency. All Examples are hypothetical and for illustrative purposes only. Actual results will vary. No part of this presentation is intended to make an offer of sale or purchase of any specific security or insurance product. These are the views of 567 and not necessarily of the named representative or any broker/dealer investment firm and should not be construed as investment advice. All information is believed to be from reliable sources. Please consult your Financial Advisor for further information.

3 Our Goals: Understand the tax rules we live under Identify misconceptions about Taxes in Retirement Understand the tools and strategies available to those nearing or in retirement Avoid the political and stick to the actionable

4 Married Filing Jointly (MFJ) Brackets Taxable Income Ordinary Income Brackets 0 - $18,650 10% $18,651 - $75,900 15% $75,901 - $153,100 25% $153,101 - $233,350 28% $233,351 - $416,700 33% $416,701 - $470,700 35% $470, % Source: Internal Revenue Service (IRS),

5 Understanding How Marginal Taxes Work Suppose you were at the top of the 15% Ordinary Income tax bracket and you earned one more dollar such that you were now in the 25% bracket. What is the impact on your tax bill? a. My tax bill would go up substantially b. My tax bill would go up a very small amount Source: Understanding How Marginal Taxes Work, (

6 MFJ Tax Brackets Taxable Income Tax Due 0 - $18,650 10% of taxable income $18,651 - $75,900 $1, % over $18,650 $75,901 - $153,100 $10, % over $75,900 $153,101 - $233,350 $29, % over $153,100 $233,351 - $416,700 $52, % over $233,350 $416,701 - $470,700 $112, % over $416,700 $470,701 + $131, % over $470,700 Source: Internal Revenue Service (IRS),

7 MFJ Ordinary Income Tax Map % 28% 33% 35% 39.6% 10% 15% Source: Tax Clarity Software Output for MFJ Tax Bracket, 2017 numbers.

8 Marginal Tax Rates

9 Capital Gains and Qualified Dividends Get Different Treatment Public Policy goal of different Capital Gains and Qualified Dividends brackets is to encourage investment Similar Marginal Tax Concept to Ordinary Income: Only the amount above the threshold is taxed at the higher rate

10 MFJ Long Term Gain and Dividend % 15% 0% Source: Tax Clarity Software Output for Capital Gains.

11 MFJ Brackets Taxable Income Ordinary Income Brackets LT Capital Gains Brackets 0-$18,650 10% $18,651-$75,900 15% 0% $75,901 - $153,100 25% $153,101 - $233,350 28% $233,351 - $416,700 33% 15% $416,701 - $470,700 35% $470, % 20% Source: Tax Clarity Software Output for Capital Gains.

12 DEDUCTIONS EXEMPTIONS CREDITS

13 Deductions For things you spend money on Standard Deduction (2017) $12,700 for Married.$6,350 for Single Itemized Deductions (Schedule A) Additional Deduction for 65+ or Blind Source: Internal Revenue Service (IRS),

14 Exemptions For Being Alive $4,050 per person in your household in 2017 Source: Internal Revenue Service (IRS),

15 Credits Designed to incentivize behavior: Healthcare Tax Credit Earned Income Tax Credit Education Credits Savers Credit

16 Deductions, Exemptions, Credits In this example, we have: Married Couple Age: 65 (both) Deductions and exemptions are based off the 2017 tax year Gross Income (MFJ): $36,000 Minus Deductions and Exemptions $12,700 Standard Deduction $1,250 (x2) Deduction for 65+ $4,050 (x2) Personal Exemptions Total: $23,300 $2,000 IRA Contribution $2,000 Deduction Total Deductions/Exemptions: $25,300 Total Income Subject to Tax: $10,700 Times 10% Tax Rate $1,070 Saver s Tax Credit for IRA Contribution $1,000 Total Tax Due: $70 Example used as illustration only and is not indicative of any particular situation. Actual results will vary.

17 Middle Income MFJ Brackets Source: Tax Clarity Software Output- Middle Income MFJ

18 The Real Tax System Required Minimum Distributions Capital Gains Social Security Benefits Medicare Premiums Potential Roth Conversions or large withdrawals from IRAs 3.8% Net Investment Income Tax PEP (Personal Exemption Phaseout) Pease (Itemized Deduction Phaseout) AMT (Alternative Minimum Tax)

19 How Do RMDs Work? Year You Reach Age 70½ Divide Prior Year s ending account balance by factor representing your Remaining Life Expectancy Prior Years Ending Account Balance: $500,000 $500,000 / 27.4 = $18,248 Source: Internal Revenue Service (IRS),

20 How Do RMDs Work? Continued Source: Internal Revenue Service (IRS),

21 Capital Gains Rebalancing Triggers Long term gains can create ordinary income tax!

22 Social Security is Taxed Based on Your Other Income Provisional Income 50% of Dividends Non- Social + Ordinary + and + Security Income Taxable Capital Interest Benefit Gains Source: AARP,

23 Benefits Tax Thresholds If you are single and your Provisional Income is greater than or equal to: $25,000 (50% of your benefit may be taxable) $34,000 (85% of your benefit may be taxable) If you are married filing jointly and your provisional income is greater than or equal to: Source: Social Security Administration (SSA), $32,000 (50% of your benefit may be taxable) $44,000 (85% of your benefit may be taxable)

24 Tax Examples $20,000 Social Security with $40,000 IRA Withdrawal = $50,000 Provisional Income $50,000-$32,000 = $18,000 $18,000 *.5 = $9,000 $50,000-$44,000=$6,000 $6,000 *.35 = $2,100 Total Taxable Benefit = $11,100 (55%) $40,000 Social Security with $20,000 IRA Withdrawal = $40,000 Provisional Income $40,000-$32,000 = $8,000 $8,000 *.5 = $4,000 $0 over Second Threshold Total Taxable Benefit = $4,000 (10%) Example used as illustration only and is not indicative of any particular situation. Actual results will vary.

25 On The Return Table assumes Married Filing Jointly, 2017 tax brackets, Standard Deduction and Personal Exemptions, plus additional deductions for over k IRA 20k Social Security 20k IRA 40k Social Security Taxable Social Security $11,100 $4,000 Taxable Other income $40,000 $20,000 Total Taxable Income $51,100 $24,000 Minus Standard Deduction and Personal Exemptions $23,300 $23,300 Net Taxable Income $27,800 $700 Total Federal Income Tax $3, $70 Example used as illustration only and is not indicative of any particular situation. Actual results will vary.

26 Medicare Excess Premiums MFJ 2017 Income Part B (Annual) Part D (Annual) 0-$170,000 $1, Plan Cost Only $170,001 $214,000 $2, Plan + $ $214,001 - $320,000 $3, Plan + $ $320,001 - $428,000 $4, Plan + $ $428,001+ $5, Plan + $ Source: Medicare,

27 3.8% Net Investment Income Tax Additional 3.8% Tax on The Lesser of: Adjusted Gross income over: $200,000 Net Investment Income: Capital Gains and Dividends Interest and Annuity Payments Passive Business Income $250,000 Rents Source: Internal Revenue Service (IRS),

28 PEP and Pease Thresholds $261,500 Personal Exemption Phase-out (PEP) Reduces Personal Exemption by 2% for each $2,500 over the above thresholds Pease Limitation (Named after Congressman Pease) $313,800 Reduces Itemized Deductions by 3% of the amount of Adjusted Gross Income over the threshold up to 80% of the amount of most itemized deductions* * Excluding Medical, investment interest, casualty and theft and gambling losses Source: Internal Revenue Service (IRS),

29 Alternative Minimum Tax Conceptually Simple: Flat tax of 26% to 28% of Income over a relatively high threshold Difficulty is in the calculation Start with your 1040 AGI and then work backwards, adding back in deductions and adjusting for transactions that are treated differently for AMT than regular income tax IRS Website: AMT Assistant:

30 Effective Marginal Tax Rates

31 MFJ Ordinary Income Tax Map % 28% 33% 35% 39.6% 10% 15% Source: Tax Clarity Software Output for MFJ Tax Bracket, 2017 numbers.

32 MFJ Long Term Gain and Dividend % 15% 0% Source: Tax Clarity Software Output for Capital Gains.

33 Case Study The Real Tax System John and Jane Married Filing Jointly 65+ $50,000 combined Social Security $15,000 of Net Long Term Capital Gains $25,000 Required Minimum Distributions $60,000 of after tax income need *Example used as illustration only and is not indicative of any particular situation. Actual results will vary.

34 The Real Tax System: Ordinary Income 55.5% 18.5% 27.75% 30% 25% Example used as illustration only and is not indicative of any particular situation. Actual results will vary. Source: Tax Clarity Software Output for John and Jane.

35 55%? How did that happen? What Intuitively Should Happen: $1,000 additional IRA Withdrawal $150 What Actually Happens: $1,000 additional IRA Withdrawal 15% Bracket $150 Causes $850 Taxable SS 15% Bracket $ Causes $1,850 Capital Gains to be taxable 15% Bracket $ Total Additional Tax Burden on $1,000 withdrawal: $550 Example used as illustration only and is not indicative of any particular situation. Actual results will vary.

36 The Real Tax System: Capital Gains 40.5% 12.75% 8.5% Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

37 Tools for Tax Control Diversify among account types IRA Roth including Roth Conversions Non-Qualified (Taxable) Use Tax Deferred Products where appropriate Properly blend withdrawals from different accounts Consider which assets should be held in which account type

38 Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

39 Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

40 Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

41 Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

42 Example used as illustration only, is not indicative of any particular situation, and is not intended as advice. Actual results will vary. Please consult with a financial professional before taking action.

43 Conclusion Your Personal Tax Map varies greatly based on your personal circumstances. Schedule a complimentary appointment for a free Tax Map Report.

44 Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. -Judge Learned Hand - Helvering v. Gregory, 69 F.2d 809, (2d Cir. 1934).

45 Feedback Sheets, Appointments Thank you for your attendance. I hope that this workshop was helpful with your planning. Please complete the feedback sheet to help us understand your interests and improve. If you would like to meet for Part 2 and Your Personal Tax Report or Social Security Analysis, please note on the sheet and book an appointment on your way out.

46 The Sequence of Returns

47 Why the Sequence of Returns Matters The sequence of returns may have less of an impact on the portfolio of a long-term investor who is no longer putting money in, nor taking money out. However, the relationship between an investor s rate of withdrawal and the sequence of returns can have a dramatic impact on a portfolio s ability to last during the withdrawal period (usually during retirement).

48 Factors Affecting Portfolio Results Before Retirement The Accumulation Phase Average Annualized Returns Asset Allocation Staying Invested In this example: Annual Income Withdrawals: None Starting Values (one time lump sum): Portfolio A = $100,000 Portfolio B = $100,000 Average Annual Return: Portfolio A = 8% Portfolio B = 8% Value at Age 65: Portfolio A = $684,848 Portfolio B = $684,848 NO DIFFERENCE Age Annual Return (Portfolio A) Portfolio A (Year-End Value) Annual Return (Portfolio B) Portfolio B (Year-End Value) 41-12% $87,695 29% $129, % $69,426 18% $152, % $59,707 25% $189, % $72,984-6% $178, % $80,136 15% $204, % $83,595 8% $221, % $92,707 27% $281, % $95,210-2% $274, % $92,155 15% $315, % $111,507 19% $375, % $130,129 33% $498, % $137,026 11% $554, % $123,597-10% $499, % $137,316 5% $526, % $182,493 17% $614, % $217,167 21% $743, % $249,091-3% $719, % $243,611 3% $738, % $309,629 11% $819, % $335,262 4% $854, % $383,875 10% $938, % $361,226 22% $1,147, % $449,727-14% $986, % $528,878-21% $780, % $684,848-12% $684,848 8% $684,848 8% $684,848

49 Factors Affecting Portfolio Results After Retirement The Distribution Phase Sequence of Returns Product Allocation Portfolio Protection In this example: Annual Income Withdrawals: 5% of first year value (adjusted thereafter for inflation) Starting Values (age 65): Portfolio A = $684,848 Portfolio B = $684,848 Average Annual Return: Portfolio A = 8% Portfolio B = 8% Value at Age 90: Portfolio A = $0 Portfolio B = $2,622,984 BIG DIFFERENCE Age Annual Return (Portfolio A) Portfolio A (Year-End Value) Annual Return (Portfolio B) Portfolio B (Year-End Value) 66-12% $566,337 29% $852, % $413,086 18% $967, % $318,927 25% $1,168, % $352,432-6% $1,061, % $348,431 15% $1,177, % $323,772 8% $1,234, % $318,176 27% $1,528, % $284,653-2% $1,452, % $232,143 15% $1,623, % $236,215 19% $1,886, % $229,644 33% $2,461, % $194,417 11% $2,687, % $126,543-10% $2,375, % $90,304 5% $2,450, % $68,219 17% $2,808, % $27,833 21% $3,344, % $0-3% $3,182, % $0 3% $3,211, % $0 11% $3,503, % $0 4% $3,594, % $0 10% $3,885, % $0 22% $4,685, % $0-14% $3,963, % $0-21% $3,070, % $0-12% $2,622,984 8% $0 8% $2,622,984

50 Individual Benefits Best 35 Years Example used as illustration only, actual results will vary. Source: Social Security Administration ( P.I.A. Benefit at age 70 Benefit at age 62 $1,680 a month $2,094 a month $1,159 a month Online Statements are available at

51 Spousal Benefits The characters in this example are fictional only. Your actual experience will vary. This hypothetical example is shown for illustrative purposes only and is not guaranteed. Jeremy PIA: $2,200 50% x $2,200 $1,100 Samantha PIA: $0 Filing at 66 Age 62 FRA Age 70 File Collect File Collect Source: Social Security Administration (

52 Additional Beneficiaries- Divorced Spouse Spousal Benefits Married to ex-spouse for 10+ years Unmarried Both are at least age 62 Divorced for at least 2 years* 10 Survivor Benefits Unmarried Married to deceased ex-spouse for 10+ years Unmarried or married after age 60 At least age *2 years does not apply if the individual was eligible for spousal benefits at the time of divorce. Source: Social Security Administration (SSA) -

53 Feedback Sheets, Appointments Thank you for your attendance. I hope that this workshop was helpful with your planning. Please complete the feedback sheet to help us understand your interests and improve. If you would like to meet for Part 2 and Your Personal Tax Report or Social Security Analysis, please note on the sheet and book an appointment on your way out.

54 TAXES IN RETIREMENT Don Kitson: Paul Hindelang: