Taxes

Taxes take a significant bite out of your income and investments. Let’s dig a bit deeper.

Introduction

Today we are going to talk about taxes, a very broad and complicated issue that oozes with politics and special favors. Does anyone really understand the tax code? Judging by the number of politicians, tax preparers, bookkeepers, CPAs and attorneys that are making a living making, developing, interpreting and finding ways around the tax code, that is almost a ridiculous question. As such, then, as a layman myself, all I can really do is try to make you aware of some of the issues I’ve run into. I’ll have some broad discussion about taxes and then end on some tax issues you need to think about when you get to retirement. If you can think about your taxes in retirement when you are young, then you can mitigate or reduce many tax issues when you get to retirement that will allow you to keep more of your money, or find better uses for it than sending it to Washington. As always, when it comes to complicated issues such as taxes, it often pays to educate yourself and work with subject matter experts when you think you need to.

The reason I am digging into taxes today is that understanding the effect of taxes on your income and investments is part of the process to determine “YOUR NUMBER",” that is the point in time where your financial situation is such that you reach financial freedom. Today’s discussion of taxes is part of a several week series of discussions where we are marching toward the point that you can determine what “YOUR NUMBER” is for you. We will then develop a personalized action plan for you to reach it. That is the beauty of what we do at Afterburner Success Partners. We take you where you are and develop individualized plans suited to your unique situation. What’s not to love?

How many federal taxes are there?

If you and I were having coffee and just talking right now, and I told you there are 97 different taxes in the federal tax code that you are required to pay, you would not believe me. Heck, I don’t even believe it myself, but it’s true. Click on the link in Note 1 to see them. Yikes! 

…and state taxes? 

Besides federal taxes, there are state taxes. These taxes may include (I say may because each state is different in what they tax and how much) state income taxes, sales taxes, property taxes, excise taxes, unemployment insurance taxes, estate and inheritance taxes, and other intangible property taxes (such as stocks and bonds, but these typically are not taxed). How does your state measure up? If you live in New York, you have the highest overall tax burden at 12.47% of your income. If you live in Alaska, you have the lowest at 5.06% of your income. Click on the link in Note 2 to see a more complete breakdown. More yikes! 

Deductions and credits

Well, that was fun, wasn’t it? NOT! Really, more depressing is the word. The good news is that, depending on your situation, there are various deductions and credits you can use to reduce your tax burden. If I were a pessimist, I would say they added these to the tax codes to make us feel better about the high tax rates we have. Hmmm, what do you think?

For the common person, we typically receive the standard deduction, which is really quite high now, and a result of the Trump tax reduction plan in 2017. If you have more complicated income, investments, or other sources of income that qualify, you can enjoy bigger deductions. In fact, some people who make a lot of money pay very little or no taxes due to these deductions. We often hear politicians call for us to “tax the rich,” but they passed the tax laws, so what’s all the screaming about? In fact, the rich already pay the bulk of the taxes, while low-income people get a pretty good deal, at least as far as paying taxes goes. Don’t believe me? Click on the link in Note 3 and study this excellent summary. For a quick overview of these various deductions and credits, click on the link in Note 4. For more details, click the link in Note 5 to visit the IRS website directly. 

How much do I pay in taxes?

We can see that each of us pays various taxes, and we may not even be aware of it. But the short answer to this question, “How much do I pay in taxes?” is that you probably pay more than you think. Why do I say this? Well, in many cases, taxes are well hidden, as we saw when we clicked on the links referenced below. Additionally, because we’ve become accustomed to them, we simply pay them and don’t think about them. Oh, and then some taxes are really called fees. Look at your water, sewer, telephone, internet, gas, or electric bill to see all the fees that have been tacked on. How about airline tickets or hotel bills? Yeah, sneaky, huh?

There has been a lot of discussion among various politicians over the years about simplifying the tax code or making it so easy that we can complete our taxes on a postcard. Or the talk was a flat tax. Whatever. Frankly, I don’t see this happening as I’ve never seen a politician want to reduce spending. Oh, sure, there is a lot of talk around election time, but frankly, don’t you believe that if they wanted to simplify the tax code, they would have done it by now? Click on the link in Note 5 to see where you are based upon your income. All that to say, we all pay a lot of money in taxes

If you think you have it bad

And as bad as all of that seems, we in the US have it better than many around the world. Go back to the article in Note 3 and scroll down to the bottom. Now, you really do appreciate your taxes, don’t you? (smile).

We are currently enjoying some of the lowest taxes in history

Staying in a positive vein, we are enjoying some of the lowest historical taxes in over 100 years. What you say? Can’t be true! Yes, as a result of the 2017 Trump tax cuts, we are.  These tax cuts were recently extended in the 2025 One Big Beautiful Bill. Click on the link in Note 7 to see a great graphical display of historical tax rates. Note that the only time tax rates were lower was during times of historically uncommon and bad events: 9/11, the housing crisis of 2006, the market crash of 1987, and the great depression. Then, notice that for significant periods, the tax rate was far higher than it is now, including periods where it exceeded 90%. Ya know, maybe it’s not all that bad after all!

Things that affect our taxes

Let’s talk about a few of the things that affect our taxes and why they are what they are. If we (that is, the country) had a balanced budget and our debt was paid off (a huge looming issue we keep kicking the can down the road on), that is, the nation’s income matched its expenditures, then everything would align, and we’d be happy. It’s just like with your personal budget. You do have a balanced budget at home, don’t you? Increasingly, individuals do not, and the government does not. When you spend more than you bring in, you create a deficit and you are “in the hole”, “upside down”, or any other several other terms to indicate you are spending more than you are bringing in.

In an attempt to match government income with spending, Congress raises taxes. As I write this, there are some attempts to cut government spending, but it’s not really going too well. As Margaret Thatcher of Britain used to say, “Socialism is great until you run out of other people’s money.” While the US is not a socialist country, we can all understand that the government does not have any of its own money; it’s all ours, which we give to it in the form of taxes, fees, and other similar contributions.

Please refer to the website mentioned in Note 8. Study these numbers for a bit; it’s staggering.

What can I do about it?

Well, aside from electing officials who will clean up the budget, in particular spending, about the only thing you can do today is use the existing tax laws to your advantage. You probably don’t want to be on the low-income side of things and just not have to pay taxes; what you want to do is be on the higher end or at least in a place where you can use approved deductions and credits to reduce your taxable income. Assuming you have deductions that exceed the standard deductions, the ones most people are familiar with are mortgage deductions and retirement savings, such as 401(k) or IRAs. A Health Savings Account (HSA), if your company offers one, is a fantastic way to earn and spend money tax-free, assuming you follow the rules that govern them. Your financial advisor and tax professional can help you here. In some cases, financial advisors and tax professionals work together on your behalf. Or, you may be able to do it yourself, depending upon your situation, but I’ll just tell you there is a lot to learn and know to ensure you are getting the full benefit of the tax laws.

Taxes in Retirement

When you retire, the tax picture changes rather dramatically and it pays to think about this before you get to that point so you are not surprised and you don’t pay more taxes than you want or had planned to.  Let’s talk broadly about a few of those issues.

If you are the average working person, throughout your career, you worked for an employer who withheld the appropriate amount of taxes from your paycheck, such that you never even noticed them, much less understood what was going on. If you contributed to a 401(k) or HSA (Health Savings Account) at work, which then reduced your taxable income, you were able to defer (not eliminate, defer, unless you have a Roth 401(k)) taxes on that amount. You may take the standard deduction, which is much higher since the Trump 2017 tax bill, or if you have significant taxable investment income, a mortgage or property taxes, donations, IRA contributions, or even a business that would cause your tax rate to change. If you were savvy, you had some control over the taxes you paid, but for the average working family, it is what it is, based on all of these factors. On April 15 of every year, depending upon how all of that worked out, you likely either had to write a check for taxes due or got a refund because you withheld too much during the year.

That all changes when you get to retirement. Let’s talk for a minute about how. Because you are no longer working, your employer is not doing the bulk of the work for you; that is, withholding taxes on your behalf.

When you claim Social Security, they will withhold taxes based on what your tax rate would be, assuming that is your only income. That may be as little as zero or, assuming you have other income, not enough. For us, I had to change the withholding to cover other income that did not account for the combined income and thus caused me to have too little overall withheld. The other option, one I absolutely hate, is to pay estimated taxes quarterly. There’s just something about doing this that rubs me wrong, so I do all I can to avoid having to do this. From a financial standpoint, paying taxes quarterly means you don’t give the government an interest-free loan with your money and is technically a more savvy way to manage your money.

If you are fortunate enough to have a pension, the default from your employer is to typically consider this as your only income and withhold taxes at that rate. Do you see how things are starting to add up, and if you are not careful, you can be in for a big tax surprise in April? If you have been a dual-income family, then this issue compounds,

It continues to get more complicated. Your income also affects what your Medicare payment will be. Income up to a certain point will enjoy the lowest cost, but once you exceed that, your monthly Medicare premium can go up significantly. And I mean significantly. That’s right, this is another big, big issue that many people neglect to consider, so my advice is to learn about and start planning around this issue immediately.

If you were a dual-income family during your work years and are enjoying dual incomes in retirement, you are probably in a pretty good spot. Then, tragedy strikes and one spouse passes away. Besides dealing with the emotional loss of a loved partner, your financial picture is going to change, too. And by a lot. You may lose the passing spouse’s Social Security and all or some of any pension they may have had (I say some or all because if you are fortunate enough to have a pension, there likely are actions you can take before you begin withdrawal that can protect a surviving spouse. But again, these choices affect your income in retirement so you need to know about them ahead of time). You are also likely going to go into a different tax status, typically from married filing jointly to single which typically increases your tax rate. This, in itself, is a significant issue that needs to be considered, and the last thing you want is for it to come on the heels of losing a life partner.

One strategy you can use during retirement is managing your income through how much of your 401(k) and IRA income you withdraw. Doing this limits your taxes (tax bracket creep is significant) and controls your monthly contribution to Medicare. This is one reason traditional advice to retirees was to ensure that everything you owned was paid off. That, and the fact that in the past, many people lived with reduced income in retirement and lived accordingly. At Afterburner Success Partners, we want to help you plan appropriately so that your retirement years are complete and enjoyable, not such that you just survive on a reduced income.

All this is fine and well, but at some point, typically about 73, depending upon the tax code at that time, you will have to begin making RMDs (Required Minimum Distributions) from your retirement accounts. The government was generous to allow you to defer your taxes for many years, but at some point, it wants that money back, and RMDs are one way to get it and it will affect your taxes.

I attended a seminar once that advocated converting all tax-deferred accounts into Roth accounts, such that it may, I say may, be possible due to limited taxable income to pay zero taxes in retirement. This is good if you can do it, but it takes careful planning and a decision on whether you want to pay taxes up front or defer them. Another advantage of Roth investment accounts is how they can be passed to heirs.

One final note on retirement taxes. If you are receiving Social Security in 2025, then President Trump’s One Big Beautiful Bill gave you some relief from Social Security Taxes for about the next three years. This could be significant, depending upon where you fall in the tax brackets. There may be other opportunities for you, and this is where your tax professional comes into play.

Oh, and a PS I’m not going to get into here. And that is how you pass your wealth to your heirs, and the tax implications of this. Let me just say, especially if you have a significant amount of wealth, the implications can be dramatic. Should you desire to pass along generational wealth from a large investment account, an expensive home or business, you really need to be talking to your tax professional. In particular, should you have ultra high wealth of over about $5 million, the Big Beautiful Bill provided you a new opportunity you want to be sure to investigate and take advantage of. I mean, given the choice to pass along a lot of money to your heirs or pay it to the government in the form of taxes, the decision is really pretty simple, don’t you agree? If any of you are in this ultra-high wealth bracket, let me give you just one example. Assume you have your wealth in property or a business you want to pass along, and you don’t have a lot of money in investments or cash. If you don’t structure all of this right, your heirs could be forced to sell your business or property to pay the taxes that are due on your estate. I know you don’t want that!

Whew! All I’m saying here is that taxes in retirement are not so simple, and they can really hurt you if you have not thought of what taxes you may pay in retirement in advance. That’s why a sound financial plan, one like we advocate for at Afterburner Success Partners, is valuable to you, and it really pays off as you age and enter retirement. Because you’ve already thought about and planned around these issues, you can enjoy your retirement and not be forced into the unfortunate choices of how you are going to pay for all of the needs you have at a point in time when you can do little about them.

The bottom line

So here’s what this all comes down to. It is in your best interest to at least understand the basics of tax laws and how they may affect you. The ultra-wealthy have teams to assist them, but for the typical person, a financial professional and a tax professional may be sufficient. As I often state, at Afterburner Success Partners, our goal is to make you wealthy, not rich. Use the benefits of the law to your full advantage. Be honest, but take advantage of what you deserve as well. Being wealthy encompasses being educated and a good steward of your finances, investing wisely, spending prudently, and giving generously.

That’s all for this week!

What’s in it for Me

Taxes can hurt you. Pay all you owe, just no more. Learn all you can. Get professional help if you need to. As you plan for your retirement, think about the effect taxes can have. It could be significant, and there are strategies you can use to minimize taxes.

Call to Action

What can you do to minimize your taxes? Are you contributing all you can to your 401(k)? How about your IRA? Do you have either a Roth 401(k) or Roth IRA available to you? How about an HSA. These are very simple opportunities; there may be other opportunities you can employ.

Recommended Resources

Besides the references in the notes, I’m just going to say, please visit with your financial advisor as soon as you can to begin these discussions. If you don’t have a financial advisor, then figure out how to find one you trust. Do you handle your own taxes or hire a professional? Be sure you are making the best decision.

Up Next

Government debt, deficits, future spending forecasts, inflation, and you.

 Notes

Please note that as an Amazon Affiliate, I may earn a small commission on the sale of any of these recommended resources.

1. Get Ready to Be Depressed…How Many Different Taxes Do I Pay?:  https://paradigmlife.net/ready-to-get-depressed-how-many-different-taxes-do-i-pay/

2. Income Tax by State: Which Has the Highest and Lowest Taxes: https://turbotax.intuit.com/tax-tips/fun-facts/states-with-the-highest-and-lowest-taxes/L6HPAVqSF

3. It’s Tax Season-Five Charts of Who Pays and What’s at Risk: https://www.cato.org/blog/its-tax-season-five-charts-who-pays-whats-risk

4. Most Common Tax Deductions and Credits: https://groovemoney.org/most-common-tax-deductions-credits?gad_campaignid=21912553592&gad_source=1&gbraid=0AAAAACTeRJ_9GmOoc0wvnQG-QdYj0Cir2&gclid=CjwKCAjwo4rCBhAbEiwAxhJlCU0e8ldGRFuMjm929x2G44e9YZJAW2_DHeBKzB9E1s_S0EWvKlj2eRoCgoIQAvD_BwE

5. Credits and Deductions for Individuals, IRS.gov: https://www.irs.gov/credits-and-deductions-for-individuals

6. 2025 Tax Brackets: https://taxfoundation.org/data/all/federal/2025-tax-brackets/

7. History of Federal Tax Rates, 1913-2025: https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

8. usgovernmentspending.com: https://www.usgovernmentspending.com