Why Your Taxes Might Go Up In Retirement

Conventional wisdom holds that when you retire, your effective tax rate will go down.  For many retirees, and especially early retirees, that unfortunately won’t be the case.  To help understand why your marginal tax rate might go up after you retire, let’s examine a few common tax-deductions workers  often take that most early retirees won’t.

Common Tax Deductions You Won’t Get

• Mortgage Tax Deduction – The mortgage interest tax deduction is an American institution.  As a nation, we love this deduction but it’s not quite as valuable as many people assume.  For starters, you only save on the portion of your mortgage interest that’s greater than the standard deduction, which in 2009 is $5,700 for single filers and $11,400 for joint filters.  What’s more, many retirees (and most early retirees, if they know what’s good for them) will have their homes paid off by the time they retire.
• No More 401k - One of the primary benefits of contributing to a 401k is that it reduces your taxable income in the current tax year.  But you guessed it, no job means no more 401k contributions which in turn means no more tax deduction.  Of course, retirees who use their new-found free time to start their own part-time business are eligible to contribute to a solo 401k plan.

Taxes Will Probably Go Up

It’s no secret the federal government has been running a massive budget deficit for years now and has accumulated an absolutely staggering national debt.  The most important reason your taxes will probably go up in retirement is simply that the federal government will probably have to raise taxes at some point to stay afloat.  And that’s not even taking into account the budget shortfalls faced by most states.  One way or another, you’re going to have to pay for Uncle Sam’s folly, and that means higher taxes.