Zero-Tax Strategy for Retirement

zero tax strategyA zero-tax strategy for retirement is a possibility for many retirees today. Under current tax law, there are seven tax brackets. They range from 10 percent to 39.6 percent. But for tax planning and retirement planning purposes, there are eight brackets. The eighth tax bracket is zero percent. This is the tax bracket that most people should be planning for in their retirement.

For example. Mr. and Mrs. Jones, a fictional couple over 65, are retired and live in Florida. They receive $17,200 in Social Security benefits. The income they receive from their retirement investment portfolio consists of $1,600 in interest, $39,500 in dividends and $12,000 in capital gains they receive from the sale of stocks and bonds. Their total income is $70,300. Their adjusted gross income is $66,120. They take the standard deduction of $14,600 as they are both over 65. Their total federal tax is zero. Their total state tax is zero, as Florida does not have an income tax.

Their zero-tax retirement strategy is simple, but conservative. They receive $1,600 in interest from their holdings in tax-exempt municipal bonds. The receive $39,500 in qualified dividends from stocks that they have held long-term. These dividends are taxed at zero percent, as their taxable income doesn’t exceed $72,500. They receive $12,000 in capital gains that constitute long-term capital gains, that are once again taxed at zero percent, as their taxable income doesn’t exceed $72,500. This couple’s taxable income is actually $43,720. They could have actually had an additional $28,780 in qualified dividends and capital gains and their total tax liability would still have been zero.

This couple’s zero-tax strategy for retirement planning follows the old school thinking of holding on to assets and living within one’s means. Nearly all their holdings are long-term, with a minimal amount of selling of stocks and bonds. This couple is essentially living off of the dividends of the stocks they have purchased over the years. Instead of selling their shares of Abbott Laboratories, that are now worth $32,600, in which their original cost basis was $2,340. They will hold the Abbott shares and reap the dividends ,which at times paid up to 4.5 percent annually.

In addition, this couple also receives a homestead exemption in the state of Florida, which will limit their real estate tax exposure. In fact, other than sales tax and some excise taxes, this may be the only tax bill that they will pay. This couple purchased their home in Florida in 2000 for $135,000. Their real estate tax bill was $1,600. Their Florida homestead exemption will limit the increase in the tax assessment to no more than 3 percent or the Consumer Price Index. In many northern states, such as New Jersey and New York, real estate taxes have nearly tripled since 2000. Therefore, retiring in the right state is beneficial to having a zero-tax strategy for retirement or at least a near zero-tax retirement.

In spite of all the complaints of the federal tax burden from Washington on the ordinary citizen, federal taxes are the lowest since 1950. The zero-tax strategy used by this couple for retirement is a perfect example. The true tax burden being imposed today on the ordinary citizen is more likely to come from state, county and local governments, as opposed to the federal government.

By  John J. Poltonowicz                       Twitter


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IRS Publication 17

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