Benjamin Franklin once said “In this world, nothing can be said to be certain, except death and taxes”. Particularly here in the USA, you certainly can’t deny that, can you? You can’t really ever avoid the subject of taxes, especially right around now since the big and dreaded April 15th deadline (ok, this year it’s April 18th) is less than a month away! The truth however is this: income taxes are not the only taxes we have to deal with every day, and retirement and taxes is something we need to plan for. It’s not something that is new and it’s not something that is going away.
The net is this: my paycheck is gross!
Back in the days when I used to get an actual paycheck, the first thing I would look at was the “net” amount of my check compared to the “gross”. There was always a big difference between those two numbers and most of it was centered on taxes. It always amazed me how many different ways they could slice up my paycheck and no matter what my salary was that number was always smashed by those payroll tax deductions.
But we have to have taxes, don’t we?
In a word, YES. When we think about taxes we usually first think about the federal income tax. Taxes themselves have been around forever…heck the American Revolution was in part caused by the taxation of the British Government on the colonies. Our federal income tax that we know today was established in 1916 by the 16th Amendment to the constitution. These taxes are imposed to allow our government to raise money for the benefit of the country and citizenry for things like national defense, and government programs like Medicare and Social Security, and maintenance for federal highways.
Even the founding fathers understood that some forms of taxation would be necessary. But the thing is, since that time in the 1700’s, we’ve been arguing about taxes and how much is too much! That debate goes on today as the Trump administration is turning its direction towards TAX REFORM 2017. More on that in a moment.
How many different kinds of taxes can you possibly have?
Just off the top of my head here, I can think of almost a dozen taxes that I pay every year and believe me, as you get older and depend on the old “fixed income” it becomes more and more of a stress and strain. If that sounds like a complaint, it is! Yes, if I had been just a bit smarter and better prepared for this time in my life maybe I wouldn’t care as much or gripe about it. But here’s my point. Most of us never think about the impact of taxes on our golden years with the only possible exception to that being federal income tax.
Do you think I thought about things like my real estate taxes? State taxes of all kinds including the dreaded sales tax. If I buy a car here in NJ for say about $20,000, the sales tax on that car is now $1,375. Back in 1973, when I bought my first new car (it was a Datsun-now Nissan Honeybee 210), it cost me $1,976 including the tax! That new car uses gas and that’s fuel taxes on my gasoline. I pay hotel taxes when I travel. Then there are the taxes on airfare and the surcharges (which are really taxes) on my baggage. Plus the sin taxes on liquor and smoking. I’m not much of a drinker and not a smoker, (if I were this would be a posthumous post no doubt!). But I can’t help but notice almost every time I buy a bottle of wine there is an increase in the price. Sigh, we sinners do have to be punished, don’t we?
If these were the only taxes, I might be able to justify a lot of it simply because I do get some of the benefit on the back end. I get the benefits of Medicare now, and Social Security…wait a second, isn’t that money I paid into the system for over 40 years being paid back to me?
Hindsight is definitely 20/20
Did I ever think about the fact that I have to include my Social Security income in my income tax calculations even in retirement? That’s something that does bother me. I never really knew how much it would do that when I was socking away my 401k money along with my “independent IRA contributions” while I was working. It’s just not in the forefront of our brains as it should be when we plan our retirement.
But what about all of those taxes that are just part of the deal because I happen to live where I live? Did I think about that in my 30’s, 40’s, and 50’s? New Jersey has a really high sales tax, super high real estate taxes, and among the highest fuel taxes. There are also local taxes of all kinds from fire department taxes, local libraries tax as well as extraordinarily high school taxes.
The bottom line is this: not everyplace you choose to live has all of these taxes and fees as part of the requirement to live in the area. That’s why a state like Delaware or North Carolina has become a haven for a lot of former NJ residents and you even hear of others who have moved out of the US for places like Mexico or Costa Rica. There they can enjoy limited taxes, a lower cost of living and still have the proximity of all the things they enjoy and have become used to: the beach, the big cities cultural advantages and in many of these places English is widely spoken too. If my health were better I’d consider moving to friendlier tax environment. But short of moving away, there is an alternative.
I keep on top of my local government and how they plan to spend our tax dollars. One simple way is to watch the broadcasts on local cable each time they meet. It’s not “must see TV” in the Seinfeld sense, although sometimes it is “about nothing” 😉 , but it’s certainly much better than being totally passive and uninformed about who stands for what. I also attend those meetings when there is something I want to say or confront. When I work at the polls on Election Day, I am constantly amazed at how many people vote that have no idea whatsoever as to who those local town board members are and what they are all about. If I were healthier, I would consider running for the township board myself.
Let me say this: I don’t have a particular party I favor. I’m really an independent even though I am registered as a Democrat. Here in NJ, in order to participate in a primary election one must declare a party allegiance. In fact, when it comes to local politics particularly, I don’t think party is something that matters. I think that making good decisions about the quality of life and affordability of living here is what the board should be most concerned about. That’s not always the case. That’s why I pay attention. You should too.
Tax reform, Trump style
Nationally, tax reform hasn’t happened around these parts for over 30 years (since the days of Ronald Reagan). There’s a really good reason for that. It’s very, very difficult to get congress to agree on what time to take a lunch break so imagine the gazillion pet priorities each member will be fighting about to change the tax system and make taxes lower for us?
And then there’s the revenue issue. Every account of the Trump team tax reform plan assumes that major tax cuts for individuals and corporations will drive the economy upwards and enable the tax rates to be lowered increasing the tax revenue or at least maintaining it. That’s a big assumption. I’m not as knowledgeable as some, but a lot of skeptics keep asking the question: how is all of the spending proposed in the Trump budget going to be paid for with lower taxes collected? Building a wall, fixing the infrastructure, spending billions more on national defense among other things will cost an awful lot of money.
Finally, there are some real concerns for single parent family fortunes under a reformed Trump tax plan. Many critics see the tax rate increasing on those least able to afford it, while the very wealthiest Americans will get a huge tax reduction. Things like doing away with estate taxes will save people like the Trump family themselves millions of dollars as part of the reform.
“The road to hell is paved with good intentions”
Don’t get me wrong, I’d love to see some kind of tax reductions, but reducing a tax or taxes is a far cry from “reforming” the tax code in its entirety. My gut and my life-long observations tell me that it cannot happen in one fell swoop and that there are just too many differing opinions on how it might or can be accomplished. If you haven’t noticed, the political in politics is a very big thing and it doesn’t disappear just because any one person like the President has an agenda. I think the President is about to find that out as he moves forward on his proposals.
Here’s the point when it comes to your taxes!
When it comes to taxes…your taxes…don’t count on some pie-in-the-sky pipedream to make it all peaches and cream for you and your family. There will be taxes coming at you from many directions as there always have been and always will be.
Basing your federal tax planning on a worst case scenario is probably a better way to go than total optimism or even more dangerous, just ignoring it. Here are some basic facts you have to deal with from now till the day you die. Taxes will exist, and they will have to be paid. They probably will go up as you get older as will wages and inflation. Check the records of the past 250 years. When you have an income, you deal with your taxes in the best way you can. One way is to make sure you adjust your withholding (W-4 form) properly so that you don’t go without your own money every week and “get a windfall” back the next year of your own money sans interest! I don’t know how many times I have to preach that and I still hear people so proud of themselves for doing just that unwise thing.
Secondly, know your tax situation and where you’re likely headed in your retirement. Think about that before you are in the situation. Roth versus traditional IRA planning? What will you need to support the lifestyle you will want in retirement and how much money will you require on top of your Social Security payments? Remember, Social Security is taxable if you have other sources of income each year that you will be using to supplement it. After all, that is your retirement goal and why you save for it, isn’t it?
Thirdly, there are programs around that can help you if you look for them. Here in NJ, we have something called the Senior Freeze. It’s a program that allows people over 65 or those who are disabled (at any age) to establish a base year for their real estate taxes and then never face a tax increase while they are income qualified. The programs may involve a rebate or a property tax freeze but they are all over the US.
Real estate taxes go up around here every year and if you don’t have to deal with that situation simply by filling out a form, isn’t that worth it? Check where you live to see if a similar program is available. Even if not, keep in mind that you can always appeal your property tax assessment.
Even the most tax-conscious of us must plan for times when our income and expenses will change, such as retirement. Be sure to include all the different forms of taxes in your considerations and do what you can to minimize your tax burden.
So, ask yourself these questions: Are you tax ready for 2017? What are you doing to prepare for your taxes in your future, especially during retirement?