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Income Planning in 2018 and Beyond


Despite his naysayers and critics, President Trump managed to “herd the cats” in Congress in late 2017 in order to pass the Tax Cuts and Jobs Act of 2017. Many among us were trepidatious, not truly believing the political hype about “tax cuts for the Middle Class.” We were (thankfully) wrong, and the tax cuts went through as promised.

Having now had time to digest the tax changes, and to incorporate them into our work as financial advisers and planners, we are able to offer suggestions for clients with varying financial goals. More than ever before, income planning has become a forefront issue. This is due mostly to two factors; reduced tax rates, and expanded tax brackets.

Not only are these changes important to working people, but they play a large role in estate planning. Think about this; would you rather pay more taxes today and leave more tax-free assets to your heirs, or leave the heirs with more eventual taxes by paying less today? The answer is not always easy, and is dependent on the legacy you choose (or, can afford) to leave.

Under the new tax law, an expanded range of planning techniques is available for both earners and retirees. My focus here will be on retirement years, and how to explore income to maximize the trade-off between taxes today and taxes later. Possibilities expand with the number of forms of income available to the retiree. For today’s retirees, these can include, but are not limited to:

  • Pension income
  • Annuity income
  • Interest and Dividends from investments
  • Required Minimum Distributions from IRAs, 401(k)s, TSP Accounts, and 403(b) Accounts
  • Social Security income
  • Disability income
  • Qualified Longevity Annuity Contracts (QLAC)
  • Part-time work
  • Real estate rentals
  • Inheritance

Some of these items are fixed, but others are variable and under control of the retiree. Some assets receive a “step-up in basis” at the death of the owner, and others do not. Some items go to zero upon the death of the retiree, but others don’t. Some receive Long-Term Capital Gain or Qualified Dividend tax treatment, but others don’t. Understanding the way taxes are levied on various forms of income is important for planning a managed tax bill and an optimized legacy at death.

For a married couple filing jointly, the marginal tax rate (the rate at which 1 more dollar of income will be taxed) was 25% over a taxable income of $75,300. With passage of the Tax Cuts and Jobs Act of 2017, the marginal rate is less than 24% all the way to $315,000, and is only 12% up to $77,400. This opens up significant possibilities when doing income planning.

Planning for income and estate taxation is part of the service of Certified Financial Planners operating in a fee-only Registered Investment Advisory (RIA). Van Wie Financial is fee-only. For a reason.