Sponsor spotlight: Retirement basics — understanding tax efficiency

Nancy Ekrem

One of the basics in retirement is to be as tax efficient with your income as possible. In 2019, income tax rates range from 0 to 37 percent, plus a potential 3.8 percent net investment tax. Understanding how these progressive tax rates apply to ordinary income creates a tremendous retirement planning opportunity.

The basic concept

Many retirees can control their taxable income each year by the amount they work and how much they withdraw from retirement savings accounts like IRAs and 401(k)s. When your income drives you into a higher income tax rate, you will need to decide if you want to maximize the tax rate applied to this range of income.

Example: Assume you are a single taxpayer with $10,000 in retirement income from a part-time job. You also have $150,000 savings in a 401(k) retirement account. The income range and applicable tax rate for a single taxpayer in 2019 is as follows:

In this example, excluding other variables, you have the opportunity to withdraw an additional $29,475 from the 401(k) at an income tax rate of 12 percent. Income beyond this amount will be taxed at 22 percent or higher.

*Note: Taxable income typically includes wages, interest, non-qualified dividends, short-term capital gains (assets owned for one year or less), taxable Social Security benefits and withdrawals from most 401(k), 403(b), and non-Roth IRAs.

Other factors add complexity

Unfortunately, planning for tax-efficient retirement is never simple. There are other things to consider:

  • Your age
  • The taxability of your Social Security benefits
  • Income phase-outs of other tax benefits
  • Required minimum distributions at age 70 1/2 or older
  • Your state tax situation
  • Other taxes (estate taxes, inheritance taxes and capital gain taxes)

What to do?

Making tax efficiency an integral part of your retirement plan can be complicated. But the rewards are tremendous for those willing to start early, dedicate the time to planning, and ask for assistance.

Don’t Fall for These 5 Audit Myths

When it comes to the perception of IRS audits, conjecture reigns supreme. The combination of the complex tax code and a government agency with the full authority to enforce it leads to some pretty wild ideas. Separating truth from fiction is an important exercise for everyone. Here are five audit myths that, if believed, can cost you during an audit:

  • Myth 1: Audits only happen shortly after tax returns are filed.

False! Audits for the most recent tax year start to ramp up a couple months after the filing deadline, but that doesn’t mean the IRS solely focuses its attention on your current tax return. It often goes back up to three years to look at your tax returns (indefinitely if fraud is suspected). Because of this, tax returns should be kept forever and supporting documents should be saved for a minimum of three years for federal purposes.

  • Myth 2: If audited, all necessary records can be reconstructed.

False! If you don’t have a good filing system for your tax records, trying to track down tax receipts from up to three years ago is challenging and may be impossible to obtain. Without proper documentation to prove a deduction or credit, you are left to negotiate with the IRS to determine a reasonable estimate. If you don’t have a good record-keeping system, start now to avoid problems during an audit.

  • Myth 3: The IRS can only audit certain items.

False! Audits typically start with a focus on a few items, but can quickly grow depending on what the IRS finds. Providing the proper documentation and answering their questions accurately and succinctly are important to keep the scope of the audit as small as possible.

  • Myth 4: Only rich people get audited.

False! While the odds of being audited are higher for taxpayers on the lower and higher end of the income spectrum, no one is exempt from an audit. Solid audit preparation practices are important for everyone regardless of how much money they make.

  • Myth 5: Going through an audit is a disaster.

False! Getting an audit notice from the IRS is unnerving, but it doesn’t have to raise your stress levels. Having an expert in your corner to deal with the IRS will help give you peace of mind. Together, we can review the audit request and make a plan to ensure the best possible result for you.

Please call if you are facing an audit or want to discuss an audit preparation plan.

— By Nancy J. Ekrem, CPA

Managing Shareholder
Dewar Meeks + Ekrem pc
Certified Public Accountants & Business Consultants

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