The New Rules of Retirement

Chapter 9Beware the Retirement Tax Ambush

Tax rates and taxes will be lower in retirement. That used to be true. Over the last couple of decades it became one of the most dangerous myths in retirement planning, and it is becoming more of a myth each year.

These days, it is rare for a person's tax rate to decline after retiring unless he or she does some careful planning (which we'll discuss in this chapter). For years, without saying so, Congress and the IRS have looked to older Americans to increase government revenues. After all, today's older Americans are the richest generation in history and also a very large generation. That's where the money is. As the Baby Boomers age, those over age 50 will become an even bigger target. Federal income taxes are not the only issue for retirees and preretirees. State and local taxes also generally are rising and likely to continue rising in many states and localities.

Taxes are one of the larger expenses in a retiree's budget—if not the largest.

Retirees face the same tax burdens and rules as other Americans. There also are a number of special tax rules that affect those in and near retirement more than most other Americans.

As a result, retirees today can incur some of the highest marginal tax rates in U.S. history. For example, Social Security benefits were tax free for many decades. Since 1993, when a couple's income is greater than $44,000 ($34,000 for single taxpayers), up to 85 percent of Social Security benefits are included in ...