Preparing Your Retirement Plan for Tax Increases

One aspect of retirement planning that cannot be “set and forget” is tax planning. Our political leaders are regularly adjusting (and mostly increasing) the different taxes we must pay on our income and property. As things stand now, 2011 will begin with a host of tax increases that will affect almost everyone and particularly working baby boomers who are urgently trying to accumulate and rebuild a retirement nest egg.

The expected tax increases arise from expiration of the so-called “Bush tax cuts.”  Unless the November elections create a seismic shift in political power, most or all of those tax cuts will disappear. This will result in the following tax increases:

1. The lowest personal income tax bracket will increase from 10 percent to 15 percent. This is one increase that even the Democrats will probably stop.

2. The second lowest tax bracket will increase from 25% to 28%. Because this is considered a “middle class” bracket, action may be taken to stop this increase.

3. The 28 percent tax bracket will increase to 31 percent. Since this bracket includes income in the $84,872 – $177,006 range for single filers, and because President Obama promised no tax increases for those making less than $250,000, this increase may be stopped as well.

4. The 33 percent tax bracket will increase to 36 percent. If you are a high-earning baby boomer, expect your paycheck to shrink unless the Republicans prevail.

5. The 35 percent tax bracket will increase to 39.6 percent. See number 4.

6. The death tax will return after a brief moratorium. Estates of $1 million or more are going to be taxed at a rate of 55 percent instead of 0%.

7.  The long term capital gains tax will increase from 15 percent to 20 percent. This of course will make investing in equities and real estate less attractive for retirement savers.

8.  The tax on dividends will increase from 15 percent to 39.6 percent. This is huge for retirement planning. It will substantially reduce net dividend income to retirees. It will also make stocks with high dividend yields less attractive, lowering their per share value relative to other stocks.

9. The marriage penalty tax will be reinstated. The “marriage penalty” arises when a married couple filing jointly pays more in taxes than two separate earners filing separately, but with the same combined income. The law that treated married couples fairly is scheduled to expire. If it does, plan for a larger tax bill and maybe adjust your withholding accordingly.

Another quasi-tax increase you can plan on is increased health care insurance premiums. Most health care economists expect health insurers to increase premiums more than usual to compensate for increased costs associated with “reform” legislation passed in 2010.

It is not too soon to look at your spending and income budget for 2011 so that you can make adjustments that may minimize the impact of these tax increases on your retirement planning.


  1. Jan says

    We are looking at trimming our stocks by October.
    My mother is gifting to bring down our inheritance from her.
    I don’t really understand the dividend tax.
    I guess I need to find CPA for the first time in our married life.
    AGGG! It is coming! I guess it is better than the tax rates in the early 80’s.

  2. says

    I think it’s worth clarifying #8. Yes, the dividend rate will go from 15 to 39.6% for those in that bracket (which is 1-2% of taxpayers–I wouldn’t call that “huge”. Just huge for a small group of folks.) It really goes from 15% to what ever marginal rate you are in.

    Actually capital gains works that way too, 20% for those in the 15% cap gain bracket, and 5% for those currently in the 0% bracket (the bottom 2 tax brackets.)

    For many of us, the health care reform is more like a tax decrease, as the federal government will be kicking in for premiums for those of us that earn under the income limits. But not until several years from now, the increase in premiums are likely to hit us in the interim.

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