My accountant husband has been staring at our 2011 income and grumbling over this aspect of retirement planning. He points out that any couple with taxable income of more than $69,000 in 2011 will pay 25 percent in taxes on the portion of the income that is above that income. Anything below it is taxed at 15 percent.
Keeping taxable income below $69,000 is a reasonable goal for anyone whose income is close to that amount -- 10 percentage points is a big jump. Now's the time to do what it takes to make that savings possible.
The federal tax personal exemption for 2011 is $3,700 -- or $7,400 for a couple. Married couples with two personal exemptions and the standard deduction of $11,600 -- a total of $19,000 -- can earn $88,000 without leaping from the 15 percent tax bracket to the 25 percent bracket. You get an additional $1,250 if you are single and an extra $2,000 if both halves of the couple are older than 65. You also can claim $1,250 if one spouse is older than 65 and the other one isn't and you file a joint return.
Of course, if you have other deductibles like high mortgage interest rates and property taxes, significant healthcare expenses or big short-term losses in the stock market, or you are a particularly generous donor to charity, you may push yourself above the standard deduction and be able to shelter more income, but many people living in retirement or not far from it are ahead of the game if they take the standard deduction.
If you decide the standard deduction makes the most sense, one good way to shelter income is by saving more in tax-advantaged retirement accounts. You can do it as long as you have earned income, such as income from a part-time job. If you have a 401(k), 403(b) or a 457 at work or you operate a small business, you can save $16,500 with an additional $5,500 catch-up contribution if you're older than 55. If your employer doesn't offer a retirement planning account, then you can still save in a traditional IRA, but those limits are lower -- $5,000 with a $1,000 catchup contribution.
Tailoring your tax-advantaged savings to keep you from sliding into 25 percent tax rate territory is definitely worth the effort. Why give Uncle Sam more than his due?