This post is a brief follow-up to our post of May 6, 2023 in which we reminded you that taxes are essential expenses that must be planned for in retirement. As is the case with other expenses expected in retirement, you must make assumptions about how your current tax expenses will change in the future to develop a reasonable estimate of the total present value of future household expenses (i.e., household spending liabilities), against which the total present value of household assets is compared to develop your Funded Status.
Congress is currently debating various changes to the U.S. tax code. If adopted, these changes may affect your expected future federal income taxes and the present value of your future essential expenses. Therefore, it makes sense for you to estimate what the financial impact of the new tax law will be on your estimated future taxes once the new law is passed by Congress and signed into law by the President.
As discussed in the May 6, 2023 post, future taxes may also increase when you receive distributions from tax-qualified accounts such as IRAs or 401(k) accounts and may also increase when you sell appreciated assets or receive other income in the future. If applicable, you should anticipate payment of such higher future taxes in your planning when using the Actuarial Financial Planner by using one of the following three approaches:
- assuming higher rates of future increases for the total tax expenses in your recurring expenses,
- inputting expected taxes as an “expected non-recurring expense” at the expected time of asset sale or receipt of other income, or
- inputting the expected “other income” items, net of the additional taxes that may be incurred at the expected time of sale or receipt of other income.
