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The Importance of Tax Management

September 18, 2010

    by John Bearss


    Hi Jerry, as always it is a pleasure to spend time with you and your listening audience.

    This week when I met with a client that is retired, I had to explain the concept of, “If you are not financially strong, then you will not be in a position to help anybody else.”  If our own government would understand this concept, maybe we would not have had to experience the financial crisis we are currently in.

    My dad taught me a wonderful lesson when I was young.  He told me there are only two ways to make money, either go out and earn more or cut your expenses so that you do not have to give everything you make away or even better do both.  As simple as that statement sounds, when it comes to investments, the same principals apply.  For example, if I have an investment that earns 6% with no fees, is that better than an investment that made 8% but had fees of 3%?  The answer to that is obvious.  I would rather make 6% and pay no fees.  But fees are not the only thing that creates expenses in investments.  What about taxes?

    As people prepare for a comfortable retirement I have been asked many times, what are the most significant hurdles most people have to overcome to become fiscally fit?  My two answers are still the same limit your taxes and use investments that can create an income stream that you can not outlive.  So today, I want to talk about tax management.

    The average American pays more in federal, state and local income taxes then they spend on food and shelter combined.  According to Tax Foundation special report No. 160, published August 2008, you will spend 74 days of the year working to pay your Federal taxes and 39 days to pay your state and local taxes. That is 113 days.  Think of it this way from January 1 through April 23 you have worked just to pay your income taxes, and this doesn’t count all the other taxes like, Medicare taxes, Social Security taxes, Gasoline taxes and a whole laundry list of other taxes.  The good news is the rest of the year your earnings will go towards the things you need and then want.  So as you can see tax management is an important topic to discuss when planning for a healthy retirement.

    Here’s a brainteaser: When is a tax deduction not a savings?  Dr. Gregory Salsbury in his book, “But What If I Live? The American Retirement Crisis poses this question and here is his answer.  He states, “Before you start to answer that, you also need to bear in mind that during your retirement years you may not see as many tax deductions as you enjoyed while you were working.  Certainly, there is the standard deduction for people aged 65 and older.  But one of the most significant deductions for so many American families has been the federal income tax deduction on mortgage interest paid.  For this very reason, along with historically low mortgage rates, many seniors are carrying their mortgage debt well into their retirement years.

    Yet there are times when this mortgage interest tax strategy can turn out to have quite a different effect for retirees.  For example, take the case of Mr. and Mrs. Jones, a retired couple who own their home outright and live comfortably off just enough Social Security benefits and IRA withdrawals to meet their annual living expenses of $39,000.  But what if Mr. and Mrs. Jones still had a mortgage?  Even with a low fixed-rate loan, they would still need enough after tax income to cover their living expenses and their mortgage payments.  Not only that, they will find that their mortgage interest deduction may decrease over time as their amortized payments increasingly consist of principal instead of interest.  Thus, at some point, the standard deduction may be more beneficial to them than claiming the mortgage interest on Schedule A.

    Indeed, to continue meeting their expenses, the Jones may have to increase the size of their IRA withdrawals.  The withdrawals will accelerate the depletion of their nest egg, increase their annual income tax and could bump them to a higher income tax bracket, thus increasing their federal income tax bill.  The withdrawals also divert money away from addressing healthcare costs, a major expense for retirees, to paying Uncle Sam.  What started out as a smart decision to take advantage of a tax deduction, soon turned into a financial disaster.  And, yes, Mr. and Mrs. Jones may end up paying income tax on 50 percent of their Social Security benefits because their income may exceed the provisional income level that protected them from income taxes.”

    So as you can see, tax management should be a part of any retirement plan.  Remember, to be able to help others you have to stay financially strong and one step of achieving this is to control your tax liability with your investments and earned income.

    If you would like to contact me with any questions or comments please e-mail me at john @ and I would be more than happy to answer your questions.

    I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence.

    About John Bearss: John R. Bearss is a Retirement Specialist with the Christian Advisor Referral. He has been helping clients and financial professionals understand financial strategies for 24 years. To speak with John Bearss directly, email him at john @ or call (800) 609-5530.

    Disclaimer: John Bearss is a registered representative of and does offer securities through Sicor Securities, Inc.  Lifetime Decisions Management, nor it’s representatives provide legal or tax advice.  Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. is not a subsidiary of nor controlled by SICOR Securities, Inc.

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