Just how high could income taxes rise?

ByJames K. Ault
Just How High Could Income Taxes Rise

Nobody enjoys paying taxes. This is one of the biggest reasons why pre-tax contributions and tax-deferred growth make traditional retirement accounts so appealing – at least during your working years.

But at some point, that money will be taxable upon withdrawal. With that in mind, it is important for you to have a plan in place that accounts for the possible taxes you may have to pay – because nobody knows just how high income taxes could rise down the road!

A Look Back at Income Taxes in the Past

Prior to 1913, revenue generated by the U.S. federal government was done so primarily via taxes on goods, such as the imposing of tariffs on imported products and excise taxes on other items like whiskey. However, the 16th Amendment to the U.S. Constitution established the right of Congress to impose a Federal income tax.

That year, the top Federal income tax rate was just a mere 7%. However, over time, this rate has vacillated, and it has been as high as 94%, with forty-nine of the past 109 years seeing a top rate of 70% or more.

The Top Federal Income Tax Rates From 1913 Through 2022

Source: Inside Gov

 

How would rates that high impact your retirement lifestyle?

Currently (in 2022), the highest federal income tax rate is sitting at just 37% (based on your income and tax filing status) – which in comparison to other years is considered quite low. But after the year 2025 – or possibly even sooner – be prepared for rates to rise… and where they’ll stop, nobody really knows.

Income Tax Rates and Brackets (in 2022)

Source: Internal Revenue Service

 

While some of the funds that you generate in retirement may be taxed as income, it is possible that others could be subject to a different type of tax – as well as a different rate. This refers to capital gains taxes.

Capital gains can be considered long- or short-term. Long-term capital gains are the profits on investments that have been held for more than one year, while short-term capital gains are incurred on investments held for one year or less.

Depending on the amount of income that you generate, as well as your tax filing status, long-term capital gains tax rates (in 2022) are 0%, 15%, or 20%, whereas short-term capital gains taxes correspond with your ordinary income tax rate.

Long-Term Capital Gains Tax Rates and Brackets (in 2022)

Source: taxfoundation.org/2022-tax-brackets/

 

Strategies for Paying Less Income Tax in Retirement

Given the possible avenues for taxation of your income and withdrawals in retirement, there are some potential strategies that could ease the burden. Some of these may include the following:

  • Take advantage of the Roth IRA (where withdrawals come out tax-free).
  • Time your Social Security income so that the benefits are not taxable (up to 85% of Social Security benefits could be taxable, based on when you file and how much other income you generate).
  • Coordinate your taxable income or withdrawals from traditional IRAs and/or retirement plans with non-taxable funds from tax-free sources.
  • Consider using tax-free loans from cash value life insurance to supplement your other retirement income sources.

Do You Have the Right Retirement Income Plan in Place?

Reducing – or even eliminating – taxes on your retirement income and withdrawals may be possible, provided that you have a good solid strategy in place. However, not properly setting up your plan could end up costing you. That is why working with a retirement income specialist is highly recommended. Click here to schedule your free consultation!

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