5 Types of Taxes People Forget to Consider – And How They Affect Your Financial Plan

5 Types of Taxes People Forget to Consider – And How They Affect Your Financial Plan

At Montgomery Taylor Wealth Management, we look at financial planning as a pyramid. In this pyramid, there are many different building blocks, and each one is absolutely important to the financial peace of mind you experience in your retirement years. Overlook one of these blocks, and the pyramid isn’t as stable as you may have thought.

With this in mind, unfortunately, there is a common block that is often forgotten: Taxes.

As the first Certified Public Accountant (CPA) Certified Financial Planner (CFP) in Sonoma County, I know firsthand what this can do to a person’s future plans.

Taxes affect every aspect of your financial plan, from your retirement income to the legacy you’re able to leave behind when you’re gone.

Tax in Santa Rosa, CA, Sonoma County, and California in general can be specifically confusing. In our experience helping families in and around Sonoma County plan for the future, there are 5 types of taxes we often see overlooked.


Schedule a no-obligation conversation with the team at Montgomery Taylor Wealth Management to see how we can help you plan for the future.


1. Taxes on Retirement Accounts

Retirement accounts, the bread and butter of your retirement plan, carry important tax rules you need to keep in mind.

Retirement accounts offer a number of wonderful benefits as you accumulate your wealth, like the ability to deduct your contributions to a Traditional IRA, or obtain potentially tax-free gains in your Roth IRA. But you can also be on the hook for a hefty tax bill if you aren’t careful when making withdrawals.

Remember, anytime you make a withdrawal from a retirement account, the money can be treated as income. So, if you withdraw $12,000 from your Traditional IRA during the first year of your retirement, for example, that $12,000 of income (among other income) is taxable at your bracket for the year. Many retirees forget that. You may be in a lower tax bracket in retirement than you were during your working years, but it’s important to keep in mind when planning for taxes.

Roth IRA withdrawals are not taxable if you’re at least 59-½ years old and you’ve owned the account for at least five years.

Discuss your withdrawal plan with a financial advisor before you retire to help ensure you don’t run out of money in your retirement years – and that you don’t give too much of it away to Uncle Sam!

2. Taxes on Social Security

Nearly 70 million Americans receive some form of Social Security each month, but it’s not common knowledge that Social Security benefits are actually taxable. Benefits are determined by the age at which you elect to receive them and can be taxed at 12.4 percent. Retirees receive $1,544 on average before taxes. Don’t forget to deduct the taxes from your Social Security payments when planning your retirement spending.

3. Estate Taxes

Many people neglect to think about taxes when transferring money to their heirs. Are you leaving a legacy or a tax burden? Your estate, essentially all of your assets at the time of your passing, can be liable for taxes if it exceeds $11.7 million.

This may seem like a high number, but keep in mind that growth and investment returns are the main thrust of your financial plan, especially if you are planning for retirement or a long-term goal. The value of all of your bank accounts, investments accounts, retirement accounts, real estate holdings, business interests, and valuables may surpass that mark without you realizing it. Often times people don’t believe that the estate tax will come into play, then their estate is hit with up to a massive 40 percent tax.

Discuss your plans with a financial advisor.

4. Property Taxes

When it comes to real estate in retirement, many retirees focus on whether they’ll have a mortgage payment, or they won’t. They forget to consider property taxes. Remember, property taxes are linked to the value of your property and not the amount of your loan, so these taxes don’t go away. Property taxes can be even more difficult to remember and to pay when they’re not tied to a loan. Depending on your property value and the state you live in, these taxes can be high. If planning to retire in Sonoma County, check out our new guide: Navigating Retirement in Sonoma County.

If you’re relocating to California in retirement, and more specifically, if you’re moving to Santa Rosa, CA in retirement, property taxes can especially come as a surprise. Make sure that property taxes are a part of your yearly housing budget.

Read our recent blog post: Retiring in California? Financial Advisor (Santa Rosa, CA) Shares 5 Factors to Consider.

5. Inheritance Taxes

Another misconception is that inheritance taxes are the same as estate taxes, as they both come into play upon a person’s passing. But there are key differences between the two.

Estates are liable for federal taxes, and are actually paid by the decedent or estate itself (typically handled by a designated trustee).

Inheritance taxes, on the other hand, are the responsibility of the inheritor. What’s more, inheritance taxes are state-imposed only, not a federal tax.

When it comes to inheritances, there are taxes to consider that affect you as well as taxes that affect your beneficiaries. Read our recent blog post: Inheritances: Financial Planning Tips for You and Your Beneficiaries.

Why Include Uncle Sam in Your Financial Plan

Forgetting to include taxes in your financial plan can have a big impact on your income in retirement, and therefore, the lifestyle you’re able to live. If you decide to relocate from California, be sure to double-check the tax structure of your new state. Moving from Santa Rosa, CA, for example, to an area with lower taxes can have a big impact on your financial plan.

At Montgomery Taylor Wealth Management, tax planning is one of our specialties. Get the conversation started. No one likes expensive surprises, especially in retirement!

Montgomery Taylor Realistic Financial Planning