Paying Tax On Money You Don’t Use

I want to take a few minutes and talk about the concept of paying tax on money you’re not even using. Well you may be thinking, well how is that possible? Well let me give you a couple of examples. First, simply put, you have an investment that’s outside of an IRA. They call that a non-qualified account. And let’s say it’s invested in a stock that’s producing a dividend and you’re reinvesting that dividend. Well as that dividend comes out, you’re paying tax on that dividend even if you’re not using it, right? And so therefore you’re paying tax on money per se, you’re not spending or using. Let’s take the scenario one step further, let’s say you’re retired and you have Social Security, well that Social Security is coming in and that alone based on all the formulas on how you calculate that, if that’s all you had, you’re likely not going to be paying Federal income tax on that. Well let’s say you have these dividends stocks again producing that and you’re reinvesting that dividend. It’s possible depending upon your incomes, if you have a high enough taxable situations on those other accounts that we’re talking about, it may make a portion of your Social Security taxable. So wow, not only did I pay tax on that money I’m not using, it’s also potentially causing tax on money that I am using. So it’s one of these situations where typically when do we want to pay tax? It depends. A lot of time it’s when we use it typically one would say. But also you want to pay tax in the years that you have the least tax liability. So once again, you hear us all the time, tax planning, tax planning, tax planning. How can we figure this out? Map out your years, look ahead. Where will I have certain incomes? Where is maybe capital gains coming into? Where do I need to take required minimum distributions? Do I have these accounts that are spitting up interest and dividends that are potentially causing additional tax that I’m not using? Some people call that phantom income when they look at those situations. So once again like I said, you usually want to pay tax when you’re using it unless there’s an opportunity to offset that or pay that in situations when you don’t have as much tax. Make sense? So once again, let me give you an example in that scenario. Let’s say I’m 70 years old and I have my RMDs are coming at 72 years old. I have these non-qualified accounts that are doing this. I have an opportunity before my income may rise at 72 to potentially realize some of these gains, realize some of this income, pay the tax and adjust the investments to something that may be not producing that anymore. I have maybe deferring taxes and such like that. So once again depending on your individual circumstance this could cause excess tax on things, money you’re not using. Wouldn’t it be nice to know you’re in the best possible situation for that? Give us a call on the screen. These are situations we deal with everyday in helping you map out a tax plan for your retirement to be the most efficient as possible.