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Tax changes affect retirement planning

(MoneyWatch) Tax strategies play a huge role when it comes to planning for retirement. Recent changes in the law, as well as the likelihood of taxes going up in the future, mean it may be time to re-examine your tax planning.

For a long time, the basic tenet of planning for taxes in retirement was that you should count on making less money and being in a lower tax bracket. But this may no longer be true. For one thing, the American Tax Payer Relief Act of 2012 has already introduced new, higher taxes for many people.

Under the law, single taxpayers with adjusted gross income over $400,000 and married taxpayers filing jointly with taxable income over $450,000 are now in a 39.6 percent tax bracket. For people in that bracket, capital gains and qualified dividends might be taxed at 20 percent instead of the 15 percent rate in 2012. Single workers with taxable income of more than $250,000 and married couples with an income of more than $300,000 also can no longer itemize their deductions.

Rande Spiegelman, vice president of financial planning at Charles Schwab, said that retirees are often surprised to find themselves paying higher taxes than they expected. The combination of Social Security income, pensions, taxable portfolio income and retirement account distributions add up to keep them in the same or even a higher tax bracket.

"One of the big mistakes is to assume you will be in a lower tax bracket," he said. "Tax rates may be heading higher, so people should plan around the idea that they will be in the same bracket they are now."

Although it is impossible to predict how the current budget impasse in Washington will be resolved, marginal tax rates likely will go up. Just this week, staunch conservative Rep. Paul Ryan, R-Wis., said he would accept a tax increase under certain conditions. There is also the fact that current personal tax rates are at relatively low historical levels.

So the prudent thing is to assume on being in at least the same tax bracket when you retire. This is a no-lose strategy, because if your tax bill does turn out to be lower, all that will happen is you will have more money than you had anticipated.

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