Though tax law seems to be changing constantly, there are still ways to establish IRAs and limit or eliminate the taxes you pay on your IRA income. The key is knowing how to position your assets and the tax implications of those decisions. Contacting a knowledgeable advisor who is well versed in retirement planning options and IRS rulings is crucial. Many people love IRAs but are surprised and frustrated when they receive their tax bill after they start drawing retirement income. We all know that taxes are a certainty of life, but there has to be a way to minimize the taxes you have to pay. How?

Let me explain.

By properly positioning your assets in retirement, you can calibrate the mix of non-taxable versus taxable income you generate. This strategy reduces the taxes you eventually have to pay. In addition, most of us are unaware of the significant impact deductions and exemptions have on our taxable income.

Another large variable impacting the taxes you pay after retirement is Social Security. Most of my clients do not understand why they are paying taxes on their Social Security. They will say to me, “Mary Lou, I already paid taxes on this money. Why do I have to pay them again?” The base amounts for taxation of Social Security benefits are as follows:

Your Social Security will be taxed if your adjusted gross income (AGI), taxable interest, dividends, refunds, capital gains, IRA distributions, and pensions are

• Over $32,000 for those married filing jointly

• $25,000 for single, head of household, qualifying widow/widower with a dependent child

• 0 for married persons filing separately who lived together during the year*

However, there is a solution. Positioning your assets according to your deductions and exemptions and using retirement plans for your loss of wages, you can compensate with non-qualified money to keep you within the guidelines of what the IRS has established for Social Security taxation.

Here is an example: While working, Bill & his wife Jean had salaries of $96,000; interest income of  $3,000; dividends of $2,000; and capital gains of $3,000. Their AGI was $104,000. Their itemized deductions were $32,000; their exemptions were $7,400. Hence, their taxable income after subtracting all deductions and exemptions was $64,600. This amount is their taxable income from which their tax liability, married filing jointly, is computed, which would be $8,836. They decide to retire at age 62 and receive their Social Security. Bill receives $1,160 a month and Jean receives $850 a month. They have just replaced $24,120 of their $96,000 in salaries with potentially non-taxable income.

Bill also receives his qualified payment of $20,000, which is taxable income and also uses non-taxable assets of $20,000 to supplement their income. Their income level is now $64,120 but only $24,030 of this income is taxable. Factoring the same interest, dividends, and capital gains their tax return after retirement would have an AGI of $32,030 which means that $4,030 of their social security would have to be reported as income on line 20b of their Form 1040. Their AGI of $32,030, with $32,000 of itemized deductions and the $7,400 of exemptions, they actually have no taxable income and will pay no income taxes.

Bottom line is that they had $64,120 of income but no tax liability. When you compare their working wages of $96,000 and a tax liability of $8,836 their net income was $87,164. Now they are retired and their net income is $64,120.

The results would be significantly different had their income consisted of more taxable income. If they had elected to receive more income from their qualified assets, it could create an additional taxable Social Security. You can see the tax impact can vary drastically from improper decisions.

If you would like to know how Social Security and the choices you make now or after retirement impact your income please contact Mary at mary@mktaxandinsurance.com.

*www.irs.gov; The IRS has a worksheet that is used to compute how much of your Social Security is taxable