CCH is a major player in the tax publication industry and likes to create charts, calculate and rank tax burdens by state. Market Watch used the CCH data to create a slide show featuring the states most tax-friendly to retirees.

Number one is Alaska but given other cost of living issues, its remoteness, and weather, it would not be on my list.

Texas and Florida make the list also, which is a plus for them.

If course, these are generalized rankings. If the gap between your anticipated retirement income and desired spending budget is small, it would be important to do an individualized analysis based on your own sources of income, etc. and to look at related taxation trends. For example, Nevada has a low tax burden on retirees but that may have to change somewhat for Nevada to get its finances in order

Here is the link to the slide show and article.

Related posts:

1. More Opinions on the Worst States to Retire
2. Ranking the 50 States for Retirement 2011
3. Taxes and Social Security: Random Thoughts and Concepts

1. Depending on the types and amount of your other income, Social Security retirement benefits are taxable.

2. To estimate whether your benefits are taxable, add up all of your adjusted gross income as shown on your tax return plus any tax-exempt interest income. To this total, add 1/2 of your Social Security benefits. If this “combined income” grand total is more than $25,000 for an individual or $32,000 for a married couple, you will owe taxes on your benefits. (If you want to use the official IRS Form 703 to make this calculation, you can find the form here.

3. If the combined income calculation according to paragraph 2 above is between $25,000 and $34,000 for an individual ($32,000 to $44,000 for a married couple), 50% of your Social Security benefits will be taxed as ordinary income

4. If the combined income calculation according to paragraph 2 above is above $34,000 for an individual ($44,000 for a married couple), up to 85% of your Social Security benefits will be taxed as ordinary income. Strangely, no matter how much other income you have, at least 15% of your Social Security benefit is never taxed.

5. If your Social Security benefits are taxable, you may voluntarily request tax withholding from your benefit checks but withholding is not mandatory. Withholding may be a good idea to avoid year end surprises. To make a withholding request, use IRS Form W-4V.  You can then to choose to withhold either 7%, 10%, 15% or 25% of your benefit to pay income taxes.

6.  Tax calculation example:  Assume you are married and filing  jointly, receiving $12,000 in Social Security benefits with a “combined income” of $42,000. This combined income exceeds the $32,000 threshold by $10,000.  Based on this, the amount of benefits that will be included in your taxable income is $5,000 which is the smaller of  half your benefits ($6,000) or half the excess income over the threshold ($5,000). If your marginal rate is 15%, the tax on your Social Security benefits is $750.  (This really is quite sad because if you are still working, you are still paying the Social Security payroll tax plus now you are paying a tax on benefits for which you previously (at least theoretically) paid payroll taxes.

7.  Some state and local income taxing authorities also will tax Social Security retirement income. The Social Security Administration cannot help you with those numbers nor will it withhold state or local income taxes from your benefits.

8.  To minimize the income taxes you will pay on Social Security income, you should try to stay below the threshold for as many years as possible. Sometimes you can control this by careful timing of when you elect to receive income, e.g., choosing to receive income immediately before or after 12/31.

Aren’t taxes fun?

Related posts:

1. New Social Security Calculator for Estimating Retirement Benefits
2. Finding the Best Strategy for Social Security Spousal Benefits
3. Filing a Restricted Application for Social Security Retirement Benefits

I don’t think Farrell likes baby boomers even though I believe he is one. He starts his piece by calling us “free spenders.” That’s amusing. I thought the debt commission report was about the government deficit and its free spending habit. Yes, baby boomers have done plenty of spending which had the effect of driving the economy for three decades. And yes, plenty of baby boomers spent without saving enough for retirement. Those boomers will pay the price by having to work longer and trying to survive on Social Security for the rest of their lives.

Farrell is even unhappy that those baby boomers who have been responsible are getting free ride. For example, the report recommends elimination of the mortgage interest deduction. Farrell laments that boomers won’t be affected because many of us have already paid off our mortgages.

We even take a hit from Farrell for the proposal to increase the gas tax. He thinks we get off easy because we won’t be driving as much when we are older.

Deep down Farrell must believe that boomers who have accumulated significant net worth over years of hard work should now be compelled to disgorge some of it to the government to help reduce the deficit, i.e., redistribute it to others.

Farrell summarizes his rant against boomers with this:

When all is said and done, Boomers may end up shouldering more of the burden to pass a sustainable government to future generations.

If this is really going to happen, it needs to happen with the estate tax, not by extracting our wealth while we need it to live on. I’m no fan of the estate tax but it will be easier for us to minimize its impact compared to fighting off attempts to tax us more while we are alive.

Actually, it’s doubtful that anything substantial will be done in response to this report. Fourteen of the eighteen commission members have to approve the report for it to become “official.”  It does not appear that the votes are there. After that, Congress will have to implement the proposed changes, i.e., stop their free spending. Spending is what politicians do to get votes.

I just hope that folks like Farrell don’t get the drums beating louder with a “let’s stick it to the boomers” message.

Here is a link to the complete article: The Debt Commissions Free Ride for Boomers

To read the commission report, go here.

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The first step, of course, is to max out contributions to your tax-deferred retirement accounts, e.g. 401(k), 403(b), and IRA. If you are lucky enough to have money left over to invest in a taxable account, here are some suggestions:

1. Own tax-free and/or tax-deferred investments. Your options here are somewhat limited and include municipal bonds and muni bond funds (tax-free) and I Bonds (tax-deferred).

2. Own individual stocks and exchange-traded funds (ETF). Conventional mutual funds can generate taxable income through dividend and capital gains distributions. This can occur even if the NAV of the fund has not increased over the year and even if you choose to reinvest the distributions. Individual stocks may produce dividend income but they will not trigger a capital gain unless and until you sell. An ETF is far less likely to make a capital gain distribution.

3. Own index funds not managed funds. The “geniuses” who manage funds are inclined to do a lot more buying and selling of investments inside the fund compared to a fund that merely tracks an index. These transactions tend to generate more taxable distributions for fund owners.

4. Offset gains with losses. As you get closer to retirement, re-balancing and re-allocating of assets in your taxable portfolio may be necessary to reduce risk. Look for opportunities to do this in a way that allows you to sell losers so as to offset taxable income generated in your other investments. Then pull the trigger to save you tax dollars.  Capital losses can be used to offset all capital gains. Up to $3,000 in capital losses can even be used to offset taxable income that is not a capital gain.

As we approach the last quarter of the year, start thinking about whether any of these strategies can decrease your tax liabilities.

Does anyone have other suggestions to share?

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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.

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To pay for the health care reform legislation, the bill included new taxes on “unearned income.” This includes investment income, interest, dividends, royalties and even rental income. Annuity income is included within the definition of “investment income.”

The original bill that passed the Senate and more recently the House included a new 2.9% tax on unearned income. The more recent reconciliation bill increased the new tax rate to 3.8%.

The new tax on unearned income will be imposed beginning in 2013. The 3.8% tax applies to investment income received by married couples filing a joint return (and surviving spouses) and having a taxable income of at least $250,000. The tax will also apply to married taxpayers filing separately with an income of $125,000, and to other single taxpayers with an income of $200,000.

The new tax will continue present law and will be applied only to income that is currently taxable. For annuities, that means only income that is above the owner’s cost basis. For a life annuity, this considers your life expectancy. (More information about taxation of annuity income.)

Although the annuity industry will work hard to get this tax repealed, I would plan on the tax being around when baby boomers retire.

If you have or are considering purchasing an annuity for retirement, keep this tax in mind when putting together your retirement income plan. If you are fortunate enough to have a six-figure taxable income when the annuity begins, you will pay the extra 3.8%.

More taxes are likely coming for retirees who plan and invest well and will have some wealth to show for it. Tax planning will be increasingly important for them.

Related posts:

1. Vanguard Enters the Guaranteed Lifetime Income Space

The first problem is one of tax planning. If you regularly receive a tax refund, you are not planning properly. Rather, you are extending an interest free loan to the government.

Why would you want to do that?

If you want to lend your money out at no interest, find someone more deserving. Better yet, why not invest that money into your retirement nest egg?

I never receive a tax refund. I always owe more taxes to the government. My issue is walking that fine line between sending a check on April 15 and being hit with an under-withholding penalty. That’s where my year-end tax planning occurs.

Some folks argue that over-withholding is really a forced savings strategy. According to this “logic”, because they never see the money, they won’t spend it.

Sorry, that is unpersuasive.

It would make much more sense (and make you more money) to direct deposit that extra withholding into a high-yield savings account. Make it an account that does not come with an ATM card or check-writing privileges and you are good to go. Let the bank hold it for you – and pay you interest – instead of letting the government use it for free.

The second problem associated with tax refunds is that people tend to treat them – and spend them – as “found money.” They consciously or sub-consciously pretend that the government sent them an end-of-year bonus. So they take that “bonus” and treat themselves to a vacation or some frivolous purchase.

It is not a bonus, folks. It was your money all along. You just were not careful about who got to use your money all year. Some folks make it worse by accepting a “refund anticipation loan” from an overpriced tax preparation service.

File online yourself. Take that refund and immediately invest it for your retirement. If you have consumer debt, use the refund to pay that debt down.

One good retirement investment option is to direct that your refund be used to purchase I-Bonds.

The final step is to contact your payroll or HR department and adjust your 2010 withholding so that you do not receive a refund next year. Before you go, use this IRS withholding calculator to determine what adjustments you should make.

Plan to succeed and you will.

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If you want to learn more about the benefits of using I Bonds for retirement, read why I like I-Bonds and the research behind the retirement income plan I developed.

The new and easy I Bond purchase method comes from your federal income tax refund. (You were planning on investing that refund money, right? After all, you let the government use it interest free in 2009!)

This is how you claim the refund:

1.  Decide how much of the refund you want to allocate toward the purchase of I-Bonds. Right now, there is an annual purchase limit of $5,000 per person using this method.  The bonds purchased from a tax refund will be issued in paper form.  You can purchase an additional $5,000 in electronic bonds but not using your tax refund.

2.  Download or use IRS Form 8888. This is the form that tells the IRS that you want to direct your refund electronically to more than one account. I Bonds are sold in $50 increments, so unless your refund is an exact multiple of $50, you will have other refund money to account for.

3.  Enter the amount of your I Bond purchase in line 1a of the form. Also enter the routing number (043736881) and account number “bonds.”  Check the “Savings” box.

4.  Enter information for direct deposit of the balance of your refund in line 1b.

After you receive the paper I Bonds, you may open a Treasury Direct account and have them converted to electronic form.

Here is the link to IRS Form 8888

Give this I Bond purchase plan some serious consideration. Five or ten years from now, you will be glad you did.

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If you are eligible for the retirement savings credit, your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate.  Your credit rate also depends on your filing status (single, married or head of household.) The maximum credit is $1,000 for single filers and $2,000 for married filers.

You are not eligible for the credit if your adjusted gross income (AGI) exceeds certain amounts as follows:

• $27,750 as a single filer
• $41,625 as head of household
• $55,500 if married filing jointly

To claim the credit, your contributions must be to a qualified retirement plan. These include a traditional or Roth IRA (but not rollover contributions), 401(k), SEP-IRA, SIMPLE IRA, the federal Thrift Savings Plan, or a 403(b) plan.

Also, you are disqualified from the retirement savings credit if any of the following apply:

• You were a full-time student for any five months in 2009 (not including online-only schools)
• You were under 18
• You were claimed as a dependent by another taxpayer.

Also, if you took a pre-retirement distribution from a qualified retirement account, that distribution will offset the credit.

The retirement savings credit is not refundable, so if you do not pay federal income taxes, you will not benefit from the credit.

To claim the credit, you must file IRS Form 8880 with your Form 1040 or 1040A.  You can download Form 8880 and instructions here.

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A smart entrepreneur has started BIDaWIZ. This online service connects consumers and business owners online with personal finance and tax professionals using a unique “I can answer your question for $xx” process. Seriously.

When you need a professional answer to a specific personal finance or tax question, you select the category, ask the question, then wait. Your question is submitted to multiple “wizards” who have been qualified to respond to your question. The wizards are CPAs, CFPs, or other credentialed financial advisors who have been accepted into the BIDaWIZ system. Those wizards who want to answer your question will submit an “Offer of Service which will include the following information:

• Credentials – Education, Professional Licenses, Work experience
• Customer Ratings – Number of questions answered and average rating
• Offer Expiration – Time until offer expires
• Est. Time of Delivery – Estimated time to receive answer
• Offer Amount – Fixed fee for providing service

Note that last part – a fixed fee for the service! How cool is it to know ahead of time exactly what you will have to pay to receive a professional answer to your personal finance or tax question?

To consider your options, you will receive an email notifying you when a bid is submitted. Then it is up to you to select a wizard (or not) and then move on the complete the engagement, all online.

I have not tried the service yet but it has received good reviews from others. If you want to learn more about having personal finance professional bid for your work, check out BIDaWIZ here.

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