America 250- Income Taxes Future

 As I noted in my two previous posts, I taught a new class called Income Taxes: Past, Present, and Future on April 15 as a small part of the nationwide America 250 effort. Previously, I described the past history of income taxes in America and current tax regulations in effect.

 

This post discusses future plans and predictions for income taxes in the future:

 

What We Know for Sure

 

2028- Temporary tax deductions put into effect under the 2025 OBBBA law are scheduled to expire at the end of 2028. This includes the “no tax ons” (for tips and overtime pay), the auto loan interest deduction, the $1,000 government “seed money” for newborn (in 2025-2028) children, and the bonus senior deduction for income-qualified older adults.

 

2029- The $40,000 state and local tax (SALT) deduction cap, enacted under OBBBA, applies to the 2025 through 2029 tax years. It will expire at the end of 2029 with the cap reverting to $10,000 for the 2030 tax year.

 

Big Concern

 

Wars have impacted income taxes throughout U.S. history. The first income tax (later repealed) began in 1862 as the Civil War was underway. Income taxes rose significantly in 1918 to pay for expenses incurred during World War I (top tax rate of 73%) and in 1944 to fund World War II (top rate of 94%). 

Since the U.S. is now involved in heavy warfare in the Middle East, many are wondering if a tax increase to pay for it will soon be implemented as was done previously. Mounting national debt and income inequality are other key factors that could impact future income taxes.

 

Future Predictions

 

What could happen in the future? Nobody knows for sure but the following ideas have been floated:

 

§  New tax laws (almost a given)

§  Higher taxes on wealthy taxpayers

§  Higher taxes on capital gains which were once taxed at ordinary income tax rates

§  Changes to the “stepped up basis” for inherited securities upon an account owners death

§  Tax on unrealized capital gains

§  Increased IRS reporting and enforcement

§  Closing tax loopholes (e.g., backdoor Roth IRAs)

§  Expanded retirement savings incentives

 

Only time will tell how income taxes will evolve. Stay up to date with blogs, podcasts, and other reputable information sources to learn about future tax law changes and how they will affect you.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

America 250- Income Taxes Present

 

As I noted in last week’s post, we are in the final stretch of 2025 income tax season and I am teaching a new class called Income Taxes: Past, Present, and Future on April 15 as a small part of the nationwide America 250 effort. Previously, I described past history of income taxes in America.

This post discusses class highlights relating to current income tax laws and policies.

 

Gross and Adjusted Gross Income (AGI)- Under current law, taxpayers start out with their gross (total) income from sources such as wages, dividends, taxable interest, business income, alimony received, and required minimum distributions from retirement plans. Adjustments to income, often referred to as “above the line deductions,” include educator expenses, student loan interest, 50% of self-employment tax, health insurance for self-employed workers, and retirement plan contributions.

 

Individual Income Tax Rates- The U.S. federal income tax system uses progressive tax rates, meaning higher levels of income are taxed at higher percentages. As of 2026, the tax brackets range from 10% to 37%. Each rate applies only to income within its bracket, so taxpayers pay gradually higher rates as their taxable income increases.

 

Long-Term Capital Gains- Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income and tax filing status. Long-term capital gains are calculated by subtracting the cost basis (usually the initial purchase price plus additional deposits such as reinvested dividends) from the selling price of an asset held longer than one year.

 

Standard Deduction- The standard deduction is a fixed amount that taxpayers can subtract from their AGI before calculating federal income tax. It reduces taxable income without requiring taxpayers to itemize individual deductions. For 2025 returns filed in 2026, the standard deduction is $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Taxpayers age 65 or older or blind may claim an additional standard deduction amount.

 

Senior Tax Deductions- There is an additional standard deduction available to taxpayers age 65 or older that reduces taxable income beyond the regular standard deduction. For 2025 tax returns, the extra deduction is $2,000 for single filers and $1,600 per eligible spouse in married couples filing jointly. The bonus senior deduction under the OBBBA tax bill is an additional temporary increase to the standard deduction designed to reduce taxable income for income-eligible older adults.

 

Required Minimum Distributions (RMDs)- RMDs originated with the creation of individual retirement accounts in 1974. They are the minimum amounts that retirees must withdraw each year from most tax-deferred retirement accounts, such as traditional IRAs and employer savings plans. Under the SECURE 2.0 Act, RMDs generally begin at age 73. The required withdrawal is calculated using IRS life-expectancy tables based on age and account balance at the end of the previous year.

America 250- Income Taxes Past

It’s the final stretch of tax season! On April 15 (when else?), I am teaching a new class called Income Taxes: Past, Present, and Future. As a small part of the nationwide America 250 effort, the class describes taxes in America since its founding in 1776. 

For almost 100 years, there was no income tax at all (until a short-lived tax that began in 1862 to help fund the Civil War) and the country earned revenue from customs duties, tariffs, and excise taxes on alcohol, tobacco, and, yes, even slaves.

In this post and the next two, I will present class highlights starting with past tax history. Below is a chronology of some key historical tax-related legislation, events, and trends:

 

1776-1861- No federal income tax existed

1862- First federal income tax to fund the Civil War and Office of Internal Revenue established

1872- Income tax repealed

1894- A 2% peacetime tax was passed by Congress and the Bureau of Internal Revenue was created

1895- The Supreme court ruled that the new tax was unconstitutional and the tax bureau disbanded

1909- President Taft recommended a constitutional amendment for government taxing authority

1913- 16^th amendment to establish an income tax was ratified and first 1040 form introduced

1918- The Revenue Act of 1918 significantly increased taxes to fund World War I (73% top tax rate)

1931- Al Capone was convicted of tax evasion and sentenced to 11 years in prison

1943- Income tax withholding was introduced

1944- Standard deductions were created and top tax rate of 94% for income over $200,000

1945-1963- Top tax rate of 91% for nineteen tax years!

1954- The tax filing deadline changed from March 15 to April 15

1969- Alternative minimum tax (AMT) created after wealthy people boasted that they paid no tax

1981- The Economic Recovery Act of 1981 lowered marginal tax rates and expanded IRA access

1986- The Tax Reform Act of 1986 simplified the tax code and lowered top tax rate from 50% to 28%

1986- Limited electronic income tax filing began

1992- Taxpayers who owed money were allowed to file tax returns electronically

2001 and 2003- Bush tax cuts reduced income tax rates and capital gains taxes

2010- The Affordable Care Act introduced the Net Investment Income Tax (NIIT) to help fund Medicare

2017- The Tax Cuts and Jobs Act (TCJA) greatly overhauled the tax code and nearly doubled standard deduction

2024- About 93% of individual taxpayers filed their income tax returns electronically

2025- The spending and tax bill known as OBBBA passed and made the 2017 TCJA tax cuts permanent 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

IRA Insights: Take-Aways From a Recent Webinar

 I recently attended a webinar about individual retirement accounts (IRAs) and income taxes that was sponsored by the Financial Planning Association (FPA). The speaker was Ed Slott, a leading national authority on IRAs who is widely quoted in financial publications for professionals and consumers. Ed and two of his staffers answered dozens of questions live and via the online chat.

Below are six key take-aways:

Tax Season Never Ends- Most people think they are done with taxes on April 15. That may be true for tax return preparation, but not for tax planning. Tax planning is an ongoing process throughout a taxpayer’s lifetime and beyond (i.e., tax-deferred accounts inherited by beneficiaries).

Many People Have a “Tax Problem”- There is more than $40 trillion invested in tax-deferred retirement savings accounts. Once account owners reach age 73, they must start taking required minimum distributions (RMDs). These withdrawals are taxed as ordinary income, which can push them into a higher marginal tax bracket.

The 10-Year Rule- This rule applies to most non-eligible designated beneficiaries (e.g., adult children, grandchildren, and non-spouse individuals) who inherit a tax-deferred retirement account, such as a traditional IRA or 401(k), when the original account owner passed away after 2019. This rule took effect as a result of the SECURE Act. The entire inherited account must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

The “At Least As Rapidly” Rule- This is an additional guideline for inherited tax-deferred accounts that applies when account owners of a tax-deferred retirement account, such as a traditional IRA, pass away after beginning their RMDs. If the original account owner had already started RMDs before passing, the beneficiary must continue withdrawing RMDs each year during the 10-year period, thereby making withdrawals at least as rapidly as the original owner was required to.

No Extension on the 10-Year Rule- There was a five-year delay in IRS clarification about exactly how withdrawals under the 10-Year Rule must be taken by non-eligible designated beneficiaries. This did not, however, extend the ten-year window to deplete an inherited account. For example, if an account owner died in 2022, the ten-year period is 2023 to 2032, and the account must be fully withdrawn by December 31, 2032. RMD penalties for non-spouse beneficiaries are now in effect. The penalty is 25% of the amount that should have been withdrawn but was not.

Tax Laws Are Transitory- Mr. Slott noted that tax laws “are always written in pencil” and are subject to change. A big unknown right now is the future of the Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end. If the TCJA is left to expire, marginal tax rates will revert to higher rates that were in effect in 2017. Slott advised the audience to “always pay taxes when rates are the lowest” and to take a long view and consider, not only current year taxes, but taxes in the future.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Income Tax Math

 Tax season is winding down. We’ve all heard the saying “In this world, nothing is certain except death and taxes.” The quote is attributed to one of America’s founders, Ben Franklin. There is also one thing that is certain about income taxes. They involve math calculations.

Below is a description of seven income tax features that involve mathematical calculations:

Tax Deductions- About 90% of taxpayers take the standard deduction and the rest itemize deductions when they are larger than their standard deduction. Either way, these calculations require subtraction. First, adjustments to income are subtracted from total income to get adjusted gross income (AGI). Next, deductions are subtracted from AGI to get taxable income.

Extra Standard Deduction- Older adults use addition to increase their standard deduction as per annually inflation-adjusted IRS regulations. In 2025, single individuals can add $2,000 to the $15,000 standard deduction for all taxpayers ($17,000 total) and a couple, both age 65+, can add $1,600 each to the $30,000 standard deduction for all taxpayers ($33,200 total).

Effective Tax Rate- This is the tax rate that you pay on your total income, reflecting the fact that different tiers of income are taxed at different tax rates. This calculation requires division. To calculate your effective tax rate, divide your tax bill (i.e., the amount owed) by your taxable income. For example, $12,000 owed on a $85,000 taxable income = 14.1%.

Required Minimum Distributions (RMDs)- RMD calculations, which affect older adults at age 73 or 75 (depending on year of birth), also require division. They are mandatory withdrawals from retirement savings accounts (e.g., 401(k) plans). The year-end balance in a tax-deferred retirement account is divided by an age-based divisor (e.g., 26.5 for age 73). For example, a 73-year old with a $150,000 account balance must withdraw $5,660.

Refund or Overpayment- This calculation involves subtraction and the result will be a positive or negative number. If total tax payments from payroll withholding are greater than total tax owed, taxpayers get a refund. If tax payments fall short of the amount owed, taxpayers must make a payment to the IRS by the tax filing date, typically April 15.

Business-Related Mileage- Self-employed taxpayers and business owners are eligible to deduct business-related mileage. Employees are unable to do so. This calculation involves multiplication: i.e., multiplying the number of miles driven by the annually inflation-adjusted business mileage rate (67 cents per mile in 2024 and 70 cents per mile in 2025).

Tax Computation Worksheet- This form is used to calculate tax owed on taxable incomes over $100,000 and involves both multiplication and subtraction. First, taxpayers multiply their taxable income by their marginal tax rate (i.e., 22% to 37%). Next, they subtract a designated amount for taxes paid on income taxed at lower rates. The result is the amount of tax owed.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

What to Do With a Windfall: March 2025 Edition

Windfalls are unexpected and often sudden sources of income. In other words, a stroke of good financial luck. Common examples include receiving an inheritance or bonus and winning the lottery. 

Each year, by late March, millions of Americans have received a windfall from income tax refunds. This year, as a result of the Social Security Fairness Act (SSFA), about three million Americans (myself included) also received a retroactive payment and benefit increase as a result of the elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). 

Suffice to say, millions of Americans currently find themselves flush with cash received from income tax refunds and/or SSFA payments. This begs the question: what to do with this money? Below are a dozen solid suggestions to handle a one-time chunk cash:

1. Pay off high-cost debt (e.g., credit card bills and loans) and overdue bills.

2. Start or replenish an emergency fund with a target goal of 3 to 6 months’ essential expenses.

3. Start or increase deposits to tax-deferred employer retirement savings (e.g., a 401(k) plan).

4. Fund a traditional or Roth individual retirement account (IRA). 

5. Start or increase deposits to a 529-college savings plan for children or grandchildren.

6. Make extra principal payments on your mortgage to shorten its term and lower the total interest cost.

7. Invest in your home with improvements that have a high payback, such as landscaping and bathroom or kitchen upgrades.

8. Buy needed “big ticket” items (e.g., furniture, electronics, or a major appliance), for cash instead of using a credit card.

9. Purchase a few hours of a certified financial planner’s time to get advice and a financial check-up.

10. Take action to achieve goals on your “financial bucket list” (e.g., travel and a new car).

11. Invest in your human capital (think certification courses, college classes, and professional conferences).

12. Make gifts to family members and qualified charities.

Also remember that windfalls can have a downside. Lower income windfall recipients can be disqualified for public benefits such as housing subsidies, SNAP, utility assistance, and Marketplace health care plan premium subsidies. 

Higher income recipients could find themselves in a higher tax bracket, paying increased taxes and, for older adults, the IRMAA surcharge on Medicare premiums. 

It is wise to double check your tax withholding for 2025 if you are the recipient of a substantial windfall.

Looking Ahead to Your 2024 Tax Return

 

With the 2023 tax filing deadline in the rear view mirror, now is a good time to look ahead to 2024 taxes that you will owe in April 2025. 

In a recent article for the Rutgers Cooperative Extension newsletter, VISIONS, I described key features of your tax return to review for future financial planning including income sources, tax write-offs, changes in tax filing status, tax rates and marginal tax brackets, tax withholding, retirement plan contributions, and capital gains and losses.

This post extends that discussion with a description of seven key steps to take to plan for your 2024 tax return due in 2025.

 

Estimate Your 2024 Income- Project your income from all sources, including wages/salary, investments, rental income, business income, etc. Consider any expected changes such as salary increases, job changes, side hustles, or expected increases or decreases in income.

 

Review Your Tax Withholding- Make sure your tax withholding aligns with estimated 2024 income. Adjust your withholding (and/or estimated quarterly payments), if necessary, to avoid an under-withholding tax penalty. The IRS withholding estimator can help make this calculations.

 

Organize Receipts and Records- Start organizing receipts and documents related to investment transactions, required minimum distribution (RMD) withdrawals, tax credits, and more. Good record-keeping throughout the year will make it easier to prepare your 2024 tax return.

 

Maximize Retirement Plan Contributions-Contribute as much as you can afford, up to the maximum allowable amount, to tax-advantaged retirement accounts (e.g., 401(k) plan). Not only does this help you save for retirement, but it can also reduce your taxable income for the year.

 

Consider Tax-Efficient Investments- Consider strategies to minimize taxes. For example, you can hold investments for a year and a day or longer to qualify for lower long-term capital gains tax rates or consider tax-free investment vehicles such as Roth accounts and municipal bonds.

 

Do Strategic Tax Planning- Explore tax planning strategies that may apply to your situation, such as bunching deductions, contributing to a Health Savings Account (HSA), Roth IRA conversions, or utilizing tax-loss harvesting to offset capital gains.

 

Consult a Tax Professional- Consider consulting with a tax professional or financial advisor for personalized guidance and advice. If you have complex financial situations or anticipate significant changes in your tax situation for 2024.

 

Finally, it is not too early to begin thinking about income taxes in 2026, when the Tax Cuts and Jobs Act (TCJA) is set to expire. If Congress does not extend the TCJA or pass a new tax law before January 1, 2026, 2017 tax rules will apply, indexed for inflation. 

As a result, there will be an increase in tax rates (e.g., 12% rate becomes 15%), standard deductions will halve, the child tax credit will revert to $1,000, and the $10,000 limit on itemizing state and local taxes (SALT) will end. Readjusting to old tax rules and tax rates and making sure that tax withholding is correct will take some advance planning.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Individual Retirement Accounts: What You Need to Know

 

The 2023 income tax filing deadline is only days away (April 15, 2024 in most of the U.S.). It will be a busy weekend for many taxpayers and tax preparers who are filing tax returns or tax filing extensions.

One of the few things that taxpayers can do to reduce their income taxes after a calendar year ends is to make a tax-deductible contribution to a traditional individual retirement account (IRA) or a SEP-IRA (for small business owners and/or their employees). The maximum contribution for traditional IRAs for 2023 was $6,500 for workers under age 50 and $7,500 for those age 50+.

 

I recently attended a Financial Planning Association (FPA) webinar about traditional and Roth IRAs presented by Ed Slott, a nationally recognized expert on IRAs and frequent presenter at conferences for financial advisors. Below are nine take-aways from his presentation:

Roth IRA Contributions- Roth IRA contributions are funded with after-tax dollars (i.e., money that has been taxed) and can be withdrawn at any time for any reason tax-free and penalty-free.

 

Taxpayer Services- There is a big difference between tax preparation and tax planning. Tax preparation is based on past history; i.e., what already happened during the previous calendar year. Tax planning involves looking ahead and projecting future income and tax write-offs.

 

Baby Boomer Challenges- Baby boomers (born 1946-1964) were the first generation with the ability to save money for retirement in 403(b)s, 401(k)s, and IRAs for decades (their parent’s generation had pensions). Many have accumulated significant sums and need tax planning help.

 

Roth Conversions- Any pre-tax dollar funds that are converted (e.g., from a traditional IRA to a Roth IRA) must be included as ordinary income in the year that a Roth conversion is made.

 

RMD Inevitability- Required minimum distributions (RMDs) are inevitable if you have a traditional IRA (unless you make qualified charitable distributions), SEP-IRA, or qualified employer retirement plan (i.e., 401(k), 403(b), 457, or Thrift Savings Plan). There is no way out.

 

Five-Year Clock- The five-year clock to determine tax-free withdrawals of earnings on a Roth IRA starts on January 1 of the year of the first contribution or conversion to any Roth IRA.

 

Roth Conversion Opportunity- Between 1944 and 1963, the top U.S. tax bracket was over 90%. Mr. Slott noted that we are currently at some of the lowest tax rates ever and that people should consider moving money from traditional to Roth accounts now- before tax rates rise again.

 

Strategic Planning- Taxpayers with large tax-deferred accounts were described as “sitting ducks.” Two proactive strategies to mitigate taxes are 1. elective withdrawals between age 59½ and 73 (or 75) to spread taxes out over more years and 2. a series of small Roth conversions. Do Roth conversions near the end of a year when you have a better idea of your income for that year.

 

Charities As Beneficiaries- People may decide to name a charity as the beneficiary of their tax-loaded retirement savings accounts and gift money in taxable accounts (with a stepped-up basis) to family members. This relieves family members of RMD hassles and the only loser is the IRS.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Do You Know Your Income Tax Rates?

 

With 2023 tax season well underway, now is a good time to examine income tax rates, which are a percentage of taxpayers’ income that is taxed. 

The U.S. income tax system is progressive, which means that taxes take a larger percentage of income from taxpayers with higher taxable incomes. Federal marginal income tax rates are established by Congress and change periodically.

There are actually five tax rates that taxpayers should be aware of: marginal tax rate, short-term capital gains tax rate, long-term capital gains tax rate, the tax rate on dividends (qualified and non-qualified), and effective tax rate. Below is a brief description of each tax rate category:

 

Marginal Tax Rate- The tax rate applied to the last dollar that an individual (or married couple filing jointly) earns. Under the most recently passed tax law, the Tax Cuts and Jobs Act of 2017, there are currently seven income range segments for four tax filing status categories (single, married filing jointly, married filing separately, and head of household) that are taxed at increasing rates as income rises. 

The current marginal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If someone is in the 22% tax bracket, portions of their income are taxed at 10%, 12%, and 22%.

 

The term “ordinary income” is frequently used to refer to income sources that are taxed at the marginal tax rates described above. Examples include salary, wage, commission, bonus, and tip income, rents and royalties, interest, and required minimum distribution (RMD) withdrawals from tax-deferred retirement savings accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs).

 

Short-Term Capital Gains Tax Rate- A short-term capital gain (STCG) is the profit made on an investment that is held for a year or less. It is taxed at the ordinary income tax rates; i.e., the same marginal tax rate as the income sources noted above.

 

Long-Term Capital Gains Tax Rate- A long-term capital gain (LTCG) is the profit made on an investment that is held for a year and a day or longer. There are three LTCG tax brackets that are based on taxpayers’ taxable income and tax filing status. The LTCG tax rates under current tax law are 0%, 15%, and 20%.

 

Tax Rate on Dividends- The tax rate on dividends depends on three factors: taxable income, tax filing status, and whether a dividend is considered qualified or  nonqualified. Qualified dividends must meet certain IRS criteria and are taxed at 0%, 15%, and 20% (the same tax rate as long-term capital gains). 

Nonqualified dividends are taxed as ordinary income. The type and amount of each type of dividend is reported to taxpayers by investment custodians on a 1099-DIV form.

 

Effective Tax Rate- This tax rate takes into account the fact that higher ranges of income are taxed at progressively increasing rates. It is calculated by dividing the total amount owed on a tax return by total taxable income. 

For example, if a couple owes $25,000 on a $150,000 taxable joint income, their effective tax rate is $25,000 ÷ $150,000 = 16.7%, even though their 2023 and 2024 marginal tax bracket is 22%. An effective tax rate is always lower than a marginal tax rate.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Tax-Deferred Retirement Savings Plans in Later Life

One place where there is a gap in adult financial education is programs for older adults age 65+. The bulk of community and workplace programs cover financial tasks and decisions to get “to retirement,” not “through retirement." 

One of the niche audiences for my business, Money Talk, is older adults grappling with financial issues such as creation of a retirement “paycheck,” paying taxes on required minimum distributions (RMDs), and simplifying financial accounts.

 

Below are key points from a recent class that I taught about tax-deferred retirement savings plans:

Tax Diversification- There are three types of investments: 1. Taxable accounts outside of retirement savings plans, 2. Tax-free accounts (e.g., Roth IRAs and municipal bonds), and 3. Tax-deferred accounts (e.g., Traditional IRAs and employer plans). Ideally, investors should have investments in all three categories for greater control over their taxable income.

 

Types of Tax-Deferred Accounts- These include employer-sponsored defined contribution plans (e.g., 401(k), 403(b), 457, thrift savings plan), Traditional IRAs funded with pre-tax dollars, simplified employee pensions (SEPs) for self-employed workers, and annuities.

 

Account Beneficiaries- It is unlikely that long-time savers with large balances will die without leaving some money in one or more tax-deferred retirement plans. It is wise to periodically review named beneficiaries and prepare a master list for periodic review and/or revision. Beneficiary types include a spouse, non-spouse (e.g., child), and qualified charity (if allowed).

 

Account Consolidation- Benefits include fewer account management fees, less maintenance (e.g., account logins, tax statements, e-mails, and investment decisions), and greater ease in calculating and withdrawing RMDs and administering a deceased person’s estate.

 

Direct Rollovers- Custodian A should send account proceeds directly to Custodian B. Indirect rollovers (where an account holder is sent the money) should be avoided because there is a strict 60-day time limit to reinvest the money in a new account and withholding taxes usually apply.

 

Rebalancing and RMDs- When RMD withdrawals are made, account owners may have to rebalance the asset allocation of their portfolio. In bull (rising) markets, consider selling assets (for a withdrawal) that have appreciated more than others to get back to target percentages.

 

RMD Calculation- A new life expectancy table took effect in 2022. Simply divide the balance in a tax-deferred account on December 31 of the prior year by the divisor in the table that matches your age. For example, $100,000 ÷ 26.5 (the divisor for age 73) = $3,774 (rounded). As retirees get older, the RMD percentage of their account balance gradually increases.

 

Account Withdrawal Timing- Account owners can make penalty-free withdrawals from tax-deferred accounts after age 59.5. Those with large balances and those who need money for living expenses may benefit from withdrawals before their RMD start date. Withdrawn money can be used for living expenses, savings in a taxable account, charitable or family gifts, and fun.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Financial Implications of Working in Later Life

After declining in early years of the pandemic, the percentage of older adults in the labor force is increasing. An estimated 21.9% of Americans age 65+ were working in 2022. 

In 2019, the older worker cohort included nearly 15% of those in their 70s. Reasons for continued work include a need for additional income (inflation), boredom, social contact, structure, and a sense of purpose.

Working longer brings financial challenges and opportunities. Below are 13 financial planning  factors to consider:

1.    Higher Social Security Benefit- This can occur three ways: 1. higher benefits payable at older ages due to delayed retirement credits, 2. higher earnings often paid to older workers, and 3. replacing low earnings from workers’ teens and 20s with higher earnings in later life.

 

2.    Tax on Social Security Benefits- Those who work and claim benefits will trigger taxes with a combined income above $25,000 (individuals) or $32,000 (married couples filing jointly).

 

3.    Social Security Earnings Limit- Those who claim Social Security before full retirement age will have their benefits reduced $1 for every $2 they earn over $21,240 (2023 limit).

 

4.    Continued FICA Tax- Like all workers, employed older adults must pay Social Security/ Medicare tax. If earnings replace prior years in a 35-year benefit formula, benefits will rise.

 

5.    Still Working Exception- Older workers who stay put can postpone required minimum distributions (RMDs) on a current employer’s plan under the “still working exception” rules.

 

6.    Continued Savings- Older workers who stay put can continue to put money in employer savings plans, often with matching, while entrepreneurs can make deposits to SEP accounts.

 

7.    Work Expenses- Costs, such as gas for commuting, continue for older employees. Older self-employed workers will incur expenses for office supplies and tools of their trade.

 

8.    Income in Lieu of Savings- Earnings from work can postpone withdrawals from retirement savings (e.g., $40,000 of earnings is equivalent to withdrawing 4% of a $1 million nest egg).

 

9.    Tax Bracket Triggers- When earnings are added to a pension, Social Security, RMDs, and other taxable income, planning is needed to avoid a higher tax rate or Medicare premium.

 

10. Tax Withholding Accuracy- With multiple income sources, accurate withholding is a must via payroll deduction, quarterly payments, and the safe harbor rules for under withholding.

 

11. Medicare Premium Tax Write-Off- Self-employed people age 65+ who are enrolled in Medicare Part B and D can deduct their monthly premiums against business income.

 

12. Employer Benefits- Workers age 65+ at large companies can still be covered by group health insurance, thereby postponing Medicare premiums. Other benefits also continue.

 

13.  Tricky Rules- Employers may have rules that prevent older workers from collecting pension benefits or former workers from returning as freelancers until a break in service.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.