As promised, we will discuss an area of financial planning that you can control in this crazy new financial world. That is tax planning. Many people do not realize how much they can manage their taxes.

Taxes are at an all-time low today. The top ordinary tax rate is 37%. After World War II, rates were over 90%!

When the Trump tax cut was approved, it was set to expire on Dec. 31, 2025. After that date, we were to revert to the previous tax code. That means most individuals’ rates will go up.

If Republicans control the Senate, this date probably will hold. If they don’t, rates may go up sooner. No matter what, rates are likely to rise at some time due to the large government deficit. You must act sooner, not later, to achieve a tax-reduction goal.

If you are not proactive with tax planning, you will likely have to pay more than necessary. Putting your W-2s and 1099s in a shoebox and taking them to your tax preparer in February is not proactive planning. To lower your tax bill, you must complete most things before Dec. 31.

There are three types of money funnels, according to the Internal Revenue Service. Today, we will discuss one type: pre-tax or qualified accounts such as 401(k)s, Individual Retirement Accounts and 403(b)s.

When you contribute money to these, it has to be earned income and you get to exclude this sum from your ordinary income in that year. The funds grow tax-free until you take money out of your account, then you pay at ordinary income tax rates. These funds also are subject to required minimum distributions. This is the type of money that affects your tax bill the most.

Managing this money correctly can reduce the tax that you pay on Social Security. It can be received tax-free if your income is low enough. As income rises, the amount that is taxable increases to 50% or 85%. If you have a lot of qualified money, such as a large 401(k) balance, it might make sense to delay SS and utilize some of your savings to live on. This is known as avoiding the SS Tax Torpedo.

It also is the asset that causes the most harm at the death of one spouse. The so-called widow’s tax happens upon the first death of a spouse. At that time, total income taxes often go up dramatically. A middle-class family could see an increase of 442%. This is caused by a reduced personal deduction for the surviving spouse, and the tax brackets are about half as wide as for married filing jointly.

One way to mitigate this might be to do Roth conversions. You must pay the income tax at the time of doing the conversion. This would take advantage of today’s lower rates and future growth of the accounts would be tax-free. Roth conversions reduce future RMDs. This also may help with future widow penalty cases.

It is important to consider possible Medicare surcharges. Also consider bracket bumping, which is a strategy to take advantage of the lowest tax rate available.

Tax planning is different from tax preparation. Work with a tax expert who understands the issue.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at

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