So many different IRS rules can cause you to pay more taxes than necessary on required minimum distributions, Social Security and Medicare, long-term capital gains, your investments, and more. Joe Anderson, CFP®, and Big Al Clopine, CPA outline 11 tax traps and the escape routes that’ll help you keep more of your money in retirement when you need it most.
Important Points:
- 00:00 – Introduction
- 01:32 – How Much Tax Do You Pay? (Federal Tax Brackets Explained)
- 03:35 – Trap: Taxes May Increase in 2026
- 04:34 – Trap: Required Minimum Distributions (RMDs)
- 06:15 – Download the Tax Planning Guide for free
- 07:35 – True/False: About 40% of people who get Social Security must pay federal income taxes on their benefits
- 07:59 – Trap: Social Security Provisional Income
- 10:57 – Trap: Medicare IRMAA Premium Hikes
- 11:28 – Medicare Part B & D Premium Brackets
- 13:25 – Download the Tax Planning Guide for free
- 14:13 – True/False: A couple can make over $95K in long-term capital gains and pay no taxes
- 14:35 – Long-Term Capital Gains Tax Brackets
- 16:15 – Trap: Real Estate Long-Term Capital Gains Tax
- 17:09 – Trap: Estimated Quarterly Tax Payments
- 18:25 – Trap: 60-Day IRA Rollovers
- 20:05 – Trap: Mutual Funds Tax
- 21:05 – Trap: Net Investment Income Tax
- 21:24 – Trap: Widow’s Penalty
- 22:22 – Trap: State Income Taxes
- 22:34 – Tax Freedom: Roth IRA
- 23:03 – Download the Tax Planning Guide for free
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Transcript:
Joe: You know what the biggest trap that you will face in retirement? Stick around folks. We will fill you in and show you how to avoid it.
Show’s called Your Money, Your Wealth®. Joe Anderson here, CFP®, CERTIFIED FINANCIAL PLANNER®, President of Pure Financial Advisors, and I’m sitting with the big man. He’s sitting right over there. He’s a CPA. Big man. Big Al, how are you?
Al: Good morning, Joe. Good.
Joe: Hey, we’re talking traps today.
Al: What kind of traps?
Joe: All sorts of traps can get in your way in regards to your overall retirement, but the biggest one is taxes. That’s today’s financial focus.
We save, we put dollars into our retirement accounts, we get a tax deduction by putting them in, and it grows tax-deferred, which is all great. But some of you will be in a big surprise as you start thinking about taking those dollars out and how much taxes that the IRS will actually take a bite out of your hard-earned money. We gotta figure out how to get more of that into our hands versus the IRS, and who better to help us out is Big Al.
Al: Do you know how your taxes will change in retirement? Your IRA, Social Security? How the capital gains work? How do you get in trouble? What are those traps? And maybe most importantly, how do you escape those taxes? And Joe, we’re talking taxes, near and dear to my heart.
Federal Tax Brackets
Joe: Let’s dive in. Look at all these numbers, Big Al. Look at all those numbers. Before you think about getting out of the tax trap, how do you escape it? You have to understand how taxes work. We’re in a marginal tax system and what that means is that there’s several different marginal rates, 10%, 12%, 22%, 24%, 32%, 35% and 37%. Single people have their own numbers and married couples have their own. They’re basically doubled. So for a quick example, if you make $100,000 a year and you’re single well, that’s between $48,000 and $103,000. So Alan, where people get a little bit confused is that because that $100,000 is between these two numbers, they assume that all of their income is taxed at that 22% rate because that’s what marginal rate that they’re in.
Al: Yes, and that is a common misconception. And so the way to think about this is, in the case of a, let’s say a single person, your first $11,000, call it $12,000 is taxed at 10%, then anything above that from $11,000 to $48,000 is taxed at 12%. You go $1 over into the 22% bracket, that $1 is taxed at 22%. Everything else is taxed at those lower rates.
Joe: Yeah, really good point because that bottom rate is $48,476. So if your taxable income is $48,477, only that $1 would be taxed at that 22%. The rest would be taxed at 10% and 12%. So understanding this is going to help you determine what tax strategy is appropriate for you. Now, you’re taxed at taxable income, right? So you get marginal rate. Some people think, do I have a marginal income? No, you have an adjusted gross income and taxable income. You have modified adjusted gross income. But when you look at these numbers on the tax tables, just understand you’re taxed at taxable income, nothing, not those other two types of taxes. So, here’s the tax trap, Big Al. Next year, we’re gonna see these rates go up. So the 10% is going to stay, but the 12% will go to 15%, 22% will go to 25%, 24%, 28%, so on and so forth. So, 26%, right, we’re going to see these income brackets revert back to where they were a few years ago. Now, this law could change, but that’s what it’s scheduled today.
Al: That’s what’s scheduled today. And not only that, you hit these brackets, the higher brackets, sooner next year if we go back to the old tax system, which what, what is the law right now? Now let’s talk about how to get out of this. Escaping at standard deduction. So you get a standard deduction for free, right? So it’s not just your income you’re taxed on, it’s your income minus your standard deduction or itemized deduction if that’s a bigger number. Realize then if you’re over 65, you get a little bit extra, like a married couple would get $30,000. But if you’re over 65, you’re both over 65, you get $1600 each in addition to that $30,000.
Joe: For those of you that have big retirement accounts, another trap here could be your RMD, your required minimum distribution. So if you have a retirement account, once you reach a certain age, you are required by law to start taking dollars out of the account. And a lot of people don’t really understand why the IRS put this into place. It’s because if you received the tax deduction going into the overall retirement plan and it’s growing tax-deferred, you’ve never paid a dime in taxes on those dollars ever. So what the IRS says, when you pull dollars out, that’s when you’ll pay the tax. Let’s say you don’t need the money, you have a pension, you’re Social Security, you have real estate income, whatever. So let’s continue to build and grow this thing and not pay tax. The IRS says no, no, right? Once you get to 70 and a half it was for years, now 72, 75. These rules are kind of fluid and they’re changing, but they’re saying now you have to pull the money out so the IRS receives their tax. If you don’t do it, right, there’s a big penalty, 25% penalty, if you decide not to take your RMDs. There’s RMDs on inherited IRAs. There’s no way around the tax. You’re going to pay, your spouse is going to pay it, the kids are going to pay it, unless you give it all to charity.
Al: So a way to get out of this, it’s uh, the escape would be a qualified charitable distribution. This is taking money directly out of your IRA to a charity. You don’t receive it, it goes right to charity. If you’re 70 and a half, you can do this. You can do up to $108,000 per person, and it counts for your required minimum distribution. And best of all, Joe, you don’t pay any tax on that qualified charitable distribution.
Joe: Hey, we’re talking taxes today. It’s pretty complex. If you need help, go to YourMoneyYourWealth.com. What we created this week is a special offer for you. You’ve been waiting for it. It’s our Tax Planning Guide. It’s going to take a deep dive and show you all the different strategies to help you reduce your taxes. A lot of times, we get our taxes filed, and you’re like, man, I wish I would have done something. Now’s the time to do something. A lot of different things that you can do, but you gotta get educated. Go to YourMoneyYourWealth.com, click on our guide, it’s our Tax Planning Guide this week. Free of charge, download it right there on your computer. Hey, we gotta take a quick break, we’ll be right back. More tax fun to go.
Andi: Do you know what your financial future looks like? Now there’s a quick and easy way to find out your likelihood of retirement success. Go to YourMoneyYourWealth.com and click on the Financial Blueprint icon. Take control of your retirement future with a Financial Blueprint today.
Joe: Hey, welcome back to the show. We’re talking tax traps today and how to avoid them.
Control what you can control. We can’t control the markets, but what you can control is the amount of taxes that you pay on your investments as long as you understand what to do. Before we get into more traps, let’s see how you did on the true/false question.
Social Security & Medicare
Al: About 40% of people who get Social Security must pay federal income taxes on their benefits. Well, that is a true statement. Not all of us pay taxes on Social Security, it depends upon our income level, but about 40% of us, Joe, do.
Joe: 40%, Alan. You know when Social Security first came about, the promise was-
Al: Yeah, no taxes on it.
Joe: Yeah, it will be 100% tax-free. Now 40% of us are gonna pay tax, and this number is continuing to grow each year. Because it’s based on provisional income. Wow. Now we’re getting really deep, Big Al. Provisional income. What the heck is that?
Al: Oh boy. Well, this is where you figure out how much your Social Security income is taxable. So you basically start with your adjusted gross income, but you add back a couple things, right? You add back tax-exempt income. Your foreign income that’s excluded and half of your Social Security. So you get a different number than your adjusted gross income.
Joe: So let’s see, you have a couple, Ted and Mary, they recently retired. They took $32,000 out of their retirement account to help with their living expenses. They got some rental property income of $12,000 and they have Social Security income of $36,000. So what do we need to figure out is all right, well, what is the provisional income? Well, you got $32,000 that comes from the IRA that shows up on the tax return. You got $12,000 of other income that shows up on the tax return, but the $36,000 is not added. They don’t take your full Social Security benefits, they take half of your Social Security benefits to figure out what your provisional income is. So you do get a little bit of a break there. But now, Al, we gotta figure out that $62,000 goes on this provisional income bracket.
Al: Yeah, and this gets kind of confusing. So of that provisional income, the first, if you’re married, $32,000 or single $25,000, is tax-free, and then the next amount from $25,000 or $32,000 is taxed at 50% and then anything over that is taxed at 85%. So it’s kind of like the regular tax schedule. You have a little bit in each bracket.
Joe: Yeah. And it’s not an 85% tax rate, right? Just 85% of the benefit would be subject to tax. So you do still get a tax break. This is federal only. So depending on what state that you live in, it could be tax-free. We live here in California, it’s tax-free in California. And I know it’s tax-free in a lot of other states. So you want to make sure that you understand that. Here’s the problem though with the provisional income and how Social Security is taxed is that they came up with these numbers, these brackets 40, 50 years ago and they never inflated them. So this is kind of a huge problem why we’ll see more and more people be subject to tax. When they first put this law into place, very few, like the top 1% of all wage earners, you know, fell into this category. So that’s why it passed through. But what happened is that they didn’t put in a COLA adjustment on there. So this has not increased, our incomes has increased. So most of us will continue to pay Social Security or taxes on our Social Security benefits.
Al: Yeah, you’re absolutely right. So there is a strategy though to think about though. Think about this. If you push out your Social Security in the future, not all of it is tax. So part of it’s tax favor, the worst it can be is 85% of it is to added to your taxable income.
Joe: Alright? Speaking of Social Security. Let’s get into Medicare or IRMAA, even though it’s not a tax. It’s a premium depending on what your income is. So the higher the income that you have, the more premium that you’re going to pay on your Medicare. Here’s the pop quiz. What is IRMAA stand for Al?
Al: I knew you’re going to ask me. I always forget. You tell me Joe.
Joe: Income related monthly adjustment amount. So they’re adjusting the amount of premium that you pay in a Medicare, depending on what your income is. Let’s kind of dive in Big Al.
Al: Depending upon your income level two years ago, affects how much you pay in Medicare premiums for the current year. So it’s how does this table work? So let’s say you’re single, you make less than $106,000, married, you make less than $212,000. Your Part B premium, which is doctors and that sort of thing, is $185 a month. There’s no additional payment for Part D. Now, if you make a little bit more, you can see what happens. The premium jumps up to $259 or $370 or $480. Joe, there’s a couple more levels that we didn’t even show where it gets even more expensive.
Joe: Yeah. So as your income increases, you just have to understand that your Part B premium is going to increase too. Where this really comes into play is that for individuals that have large retirement accounts. And as those required minimum distributions hit, that means more income has to come out. As more income comes out, it could pop you up into these higher IRMAA brackets. Another way that people get into these higher brackets in retirement is that if they’re doing Roth conversions, right? Or if they inherit an IRA that they’re taking distribution. So a lot of these retirement accounts. right? That are embedded in tax really have a lot of effect on your standard tax rate, federal and state and also your Medicare premiums.
Al: Yeah. So a couple ways maybe to try to reduce this IRMAA tax is think about when you’re taking those distributions from your IRA. Like if you want to do a home improvement or a big vacation. If you pull it all out at one point, it may affect your premiums in a couple years down the road. Also think about investing tax efficiently. Maybe municipal bonds, tax-free income. Maybe try to do tax loss harvesting. Maybe try to take money from Roth conversions so you got less income for less Medicare premiums.
Joe: Wow. Did you get all that, folks? It’s a mouthful. Where do you go? Right? Well, let’s get a document that just took everything about taxes in 2025 and ways to reduce that tax bill. Go to YourMoneyYourWealth.com, click on that Tax Planning Guide. We gotta to take another break. When we get back, we’re gonna do some rapid fire. Lot more traps, lot more rescues. Stick around.
Andi: You can’t get enough. Joe and Big Al? Follow us on the Your Money, Your Wealth® Podcast in your favorite podcast app and on YouTube.
Joe: Hey, welcome back. We’re talking tax traps.
If you need a tax planning guide for 2025, go to YourMoneyYourWealth.com. Click on that guide. Understand the strategies that you need to do to put more money back into your pocket versus the IRS. Let’s see how you did on that true/false question.
Long-Term Capital Gains
Al: A couple can make over $95,000 in long-term capital gains and pay no taxes. That is true, as long as you only have capital gains. In other words, if you’re in the 10% bracket or 12% bracket, and all you have is capital gains, then you’re going to pay zero on your capital gains taxes, Joe.
Joe: So here’s the brackets. There’s 3 cap gain brackets. So there’s ordinary income brackets. And there’s capital gain bracket brackets. Again, this is just on the federal side. So if you are in that 10% or 12% marginal bracket, if you’re single or married, the top of those brackets is around $50,000. For single, $100,000 for married, right, or $96,700 and $48,350. If your taxable income is below that, there is no capital gains tax. It’s 100% tax-free. So if you have a capital gain with no other income and you sell that mutual fund, or you sell that stock, and you have roughly a $100,000 capital gain, you will not pay any tax on that. Now, then it’ll go to the 15% tax bracket or 20% tax bracket, really depending again on what marginal rate that you’re in or what your taxable income is. If you’re making more than $550,000 roughly as a single tax payer, or $600,000 as married, your capital gains rate is gonna be at 20%. Again, it’s marginal. So some of it would be taxed at 0%, 15%, and 20%, really depending on where you fall, how much capital gain that you have. And what’s your taxable income?
Al: So, for example, let’s say you’re a married couple. You make $90,000, right? So that’s your taxable income. You could sell about $7000 of capital gains and pay no tax. If it’s $8000 or anything higher, that little extra part that gets you over about that $97,000 is taxed at 15%.
Joe: All right, let’s talk about real estate. Because now, if I have a mutual fund, a stock, a bond, or any other capital asset, I have to pay that capital gains tax. Real estate’s a little bit of a funny animal here. If I have my primary home, there’s an exclusion. Individuals can exclude $250,000 of gain. If I’m married, $500,000, right? But I have to live in that primary two out of the last 5 years. If I have a rental property, Al, it’s a totally different game.
Al: Well, it is, because with rental properties, you take depreciation on that property, meaning you get to take a part of the cost as a deduction every year. When you sell the property, you have to recapture that. And there is no exemption that we just talked about on your primary residence. So you’ve got to pay full capital gains tax plus taxes on recapture, which is why some people do 1031 exchanges where you sell one property and exchange into another property to not pay the taxes currently.
Joe: A lot of people are worried about estimated payments, right? When you’re working, you have a W2 employer, the taxes already come out of your income and you get your net paycheck and off you go. But once you’re retired, you have to withhold taxes, either from the distributions from your retirement account, or you have to pay estimated quarterly payments, Al. And sometimes people don’t necessarily pay enough or understand how this all works.
Al: Yeah, because you’re used to having your money withheld from your paycheck, and that covers your tax. When you retire, many times you gotta pay estimated payments. And if you don’t make those estimated payments, the IRS charges you an interest rate. These interest rates keep floating and changing. Right now as we film this show, they’re 8%. So in other words, if you miss your first quarter, your second quarter payment and so on, you’re going to get charged annualized 8% interest.
Joe: Yeah, I think what you need to do is just understand and plan on how much income that you’re going to receive from the year. And what sources that you’re going to receive that from. Is it a capital gain? Is it tax-free? Is it going to be ordinary income? And then just try to come up with timely payments on that. You probably want to pay it quarterly or if you want to withhold from the retirement account or just have some estimates on that capital gains. IRA rollovers.
More Tax Traps
Al: Yeah, so you can get tripped up on this. So a lot of times people just request a rollover from their 401(k) or their company pension plan and they get a check. They get a check and the company is required to withhold 20%. So Joe, that’s a big problem.
Joe: You know, we see this more often than we should. So you get, all right, Hey, I’m, I’m, I’m retired. I’m out of my employer, or you have an IRA that you want to move from, let’s say one custodian to the next. And you don’t do an ACAT transfer or custodian to custodian direct transfer. You get the money. This is called a 60-day rollover. Let’s say it’s $100,000. You get a check for $100,000, it is in my name, Joseph Anderson. But wait a minute, I don’t have $100,000, it’s $80,000. Because the rules are that you have to withhold 20% if it comes from, let’s say, your 401(k) account. So it’s like, well, man, I gotta get $20,000. It’s on a 60-day rollover. So let’s say I deposit the $80,000, I gotta come up with that other $20,000 to make me whole within that 60 day time period. If I don’t, that $20,000 would be 100% taxable and if I’m under 59 and a half, then I get a 10% penalty on top of that. So some people do just roll over the rollovers. You just want to understand the rules here because it gets confusing. There’s a direct rollover versus a standard rollover. And it’s like, well, what do I do here?
Al: Well, because you check the box on the form and these, they sound the same, transfer, rollover, sounds the same thing. Make sure you do the right one. And the, and the right one is a custodian-to-custodian transfer. So you never get the funds. There’s never any withholding and you don’t pay taxes on that.
Joe: Here’s another silent tax. A lot of you have mutual funds. A lot of those mutual funds might be outside of a retirement account. If it’s in a retirement account, no big deal because everything grows tax-deferred and you gotta pay the piper when you take distributions. Unless it’s a Roth. It’s a 100% tax-free. But if I have mutual funds that are sitting outside in my brokerage account, just understand that mutual funds, they must distribute any dividends or realize gains at the end of the year. So all of a sudden, even though my mutual fund might be down in value, I might get a tax bill because they had capital gains and they realize those capital gains as that mutual fund manager is buying and selling different stocks within the fund. This is really put salt on the wound. And it’s more confusing that most people want to handle.
Al: Yeah, and I think index funds and passively managed ETFs are better way to go. There’s less of those. Another- another trap, I guess, is net investment income tax. So this happens when you’re single and your income is above $200,000, married $250,000. You have to pay an extra 3.8% tax on your investment income, interest, dividends. rental income, business income that you’re not actively involved with. So just make sure you plan for that.
Joe: Here’s a somber one. The widow’s penalty, right? You’re married, you have income, one spouse dies, but now your tax rates get cut in half. And how it works is that, let’s say you have a retirement account, or you have a pension that is 100% survivor, so you have a fixed income coming into the family. All right, so let’s assume it’s $100,000. As a married couple, that $100,000 would be taxed at, let’s say 12%. One spouse dies, but that $100,000 still comes into the household. Guess what? I’m not taxed at 12% anymore. I just jumped up to the 22% tax bracket because now I’m a single taxpayer versus a married filing jointly taxpayer.
Al: Yeah. Also consider state taxes. So sometimes we don’t think too much about it but some states are very expensive to retire in and others are not as expensive. When you look at income taxes, property taxes and sales taxes all together, the most expensive state to retire in is New York at 12.3%. Alaska’s actually the cheapest at 5.2%. California in the middle.
Joe: All right, All. We made it to the end, freedom! How do we get rid of tax? Well, I don’t know, the best investment I think the IRS ever invented is the good old Roth IRA. Tax-free distributions. No provisional income. Right? No RMD requirements. Tax-free inheritance. So it’s tax-free for your life. It’s tax-free for the spouse’s life. It’s tax-free for the kid’s life. All right, that’s a mouthful. We kind of threw a lot at you here today. If you need more help with that, you know where to go. Go to YourMoneyYourWealth. com. Click on that special offer. It’s our Tax Planning Guide. Get planning, save some money in tax, let that money stretch, and enjoy your retirement and not worrying about those tax traps.
For Big Al Clopine, I’m Joe Anderson. This is another wonderful episode of Your Money, Your Wealth®, and we’ll see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
