For a long time, the basic tenet of planning for taxes in retirement was that you should count on making less money and being in a lower tax bracket. But this may no longer be true. For one thing, the American Tax Payer Relief Act of 2012 has already introduced new, higher taxes for many people.
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Rande Spiegelman, vice president of financial planning at Charles Schwab, said that retirees are often surprised to find themselves paying higher taxes than they expected. The combination of Social Security income, pensions, taxable portfolio income and retirement account distributions add up to keep them in the same or even a higher tax bracket.
"One of the big mistakes is to assume you will be in a lower tax bracket," he said. "Tax rates may be heading higher, so people should plan around the idea that they will be in the same bracket they are now."
Although it is impossible to predict how the current budget impasse in Washington will be resolved, marginal tax rates likely will go up. Just this week, staunch conservative Rep. Paul Ryan, R-Wis., said he would accept a tax increase under certain conditions. There is also the fact that current personal tax rates are at relatively low historical levels.
So the prudent thing is to assume on being in at least the same tax bracket when you retire. This is a no-lose strategy, because if your tax bill does turn out to be lower, all that will happen is you will have more money than you had anticipated.
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