Want to Cut Taxes? Find Them First

Roth IRA conversions and Required Minimum Distributions on traditional retirement plans are hot topics (and sales topics) in financial services right now.

For most families other than those with serious health challenges, taxes are the biggest retirement risk we face. And these are important tax topics with a lot of bad information.

Federal tax rates and policies tell only part of the tax risk story ─ whether people are keeping more of what they earn.

Congress can lower income-tax rates, and it has. The 2017 Tax Cuts and Jobs Act reduced individual and corporate tax rates. The 2025 tax law kept the lower individual brackets from expiring. For lawmakers who put lower taxes near the top of (or as their only) policy agenda, that counts as success.

But it’s a narrow way to look at household finance.

A family does not live on its marginal tax rate. We live on what is left after taxes, health care, insurance, utilities, housing, interest and dozens of other claims on the same paycheck, whether retired or not.

Some of those costs are taxes; others behave much like taxes. Others are not taxes at all, but they still consume personal and national capital – the sole source of which is personal-business production.

If managing your tax bill is important, it pays to first know where these costs reside.

We can’t be great at tax planning without understanding all three types, so we will address them in a 2-part newsletter.

In this first part, let’s define the most direct type.

First are actual taxes and tax sources: the money government collects directly or indirectly, sometimes without changing the tax rate. A good example is the taxation of Social Security benefits. The income thresholds that determine when benefits become taxable have not been adjusted for inflation.

As incomes rise over time, retirees are pulled into higher taxes even though Congress never changes the rate. The original tax thresholds for Social Security were established in 1983. A married couple today has about 30% of the purchasing power it had when Congress established the tax on Social Security in 1983. Congress didn’t vote; inflation effectively did it for them.

Tariffs belong here too. Tariffs are taxes on imported goods. They are collected from importers, but a good portion trickle into the price businesses and consumers pay. If you don’t think this way, you don’t shop for groceries or buy lumber. Unlike an income-tax increase, there is no separate line on a household tax return showing how much was paid.

Second are government or regulated expenses that behave like taxes: recurring costs that households have limited ability to avoid. Health care and Medicare premium surcharges are glaring examples.

In Part 2 we will explore these two remaining pressure points on household budgets: government expenses that behave like taxes, and expenses that are not taxes but compete for the same household budget.

Tax planning will only be successful when we’ve defined the problem to solve.