Retirement confidence and savings might be on the rebound as the bulls continue to run wild on Wall Street and repair nests eggs, but there is still a gaping hole in many people’s plans: tax strategies.

“When it comes to the size of your retirement savings, it’s all about taxes,” says Dave Richmond, founder of financial planning firm Richmond Brothers in Jackson, Mich. “It’s all about the net; you can only spend the money you are left with after taxes. If you’ve amassed $1 million that’s great, but if that gets taxed at 30%, that means you are only left with 70% to spend -- that’s a different retirement picture.”

According to a survey from Lincoln Financial Group, retirees significantly underestimate the impact of taxes in their golden years. Many respondents planned for mortgage, health care and travel/leisure costs to be their top expenses in retirement; in reality, it’s paying Uncle Sam.

In fact, 36% said taxes were a larger expense than they anticipated, and 23% admitted not even considering tax expenses in their retirement planning.

“Taxes are retirees’ biggest surprise, but it shouldn’t be that way. That’s one area that they actually have a lot of control over,” says Christopher Price, advanced sales attorney for Lincoln Financial Distributors.

The survey is based on interviews with 750 individuals with a household income of at least $100,000.

“Taxes are the silent killer to retirement plans,” says Josh Kadish, partner at PRG-Life Transition Specialists. “They aren’t in your face when it comes to investing. When we are working, we see taxes everywhere: income taxes, FICA, Medicare, state income taxes, it’s all right there. But when you are looking at your investments, you really have to dig to find them.”

To help reduce taxes in retirement, financial experts offer the following tips:

Reduce Your Expenses Going into Retirement. Retirees should aim to pay off debts like a mortgage or outstanding credit card bills before leaving the workforce.

“The more money you need in retirement, the more likely you are going to have to withdraw more from a retirement account or sell assets -- that means paying more taxes,” says Kadish.

Diversify your Tax Status. Richmond recommends people create “three pots of money” to have available to tap in retirement.

“You want to have a 401(k) that rolls into an IRA, non-qualified money like a joint or trust account, and tax-free money like a Roth IRA that can all be drawn on when the time comes.”

Kadish says that many retirees mistakenly think they will be a in a lower tax bracket after leaving the workforce. “With income coming from Social Security, property rentals, taxable brokerage accounts, pensions, bonds and savings, those are all susceptible to being taxed on some level.”

Create an Asset Liquidity Strategy. As part of a larger retirement savings plan, Kadish recommends people identify which accounts to tap first, second, and so on to keep taxes to a minimum.

“Most people don’t do this right,” he says. “Let’s say you need $45,000 from your investments each year and you draw first from a traditional IRA or 401(k) because it’s your biggest account -- that will hurt you tremendously because it’s taxed as ordinary income.” He advises people tap their savings accounts at a bank that are won’t be hit with taxes. “That literally just saved you $10,000 -- that is real money.”

Keep Your Adjusted Gross Income Low. Retirees' adjusted gross income (AGI) determines their tax bracket, which means less money to spend, says Richmond.

“When your adjusted gross income rises that can bring bad tax consequences like losing certain itemizations, Medicare premiums can go higher…many things are attached to that number so you want to keep it as low as possible.”

Social Security benefits are taxed on combined incomes, which takes into account a person’s gross income plus non-taxed interest and half of the benefits, according to Kadish.

“If you file as married jointly and your combined income is below $32,000 you pay no taxes on Social Security benefits. As your income increases, you will pay  more in taxes on the benefits. There is some good news though: the maximum amount of your Social Security benefits that will be taxed is 85%.”

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