Step 10: What Uncle Sam Takes "Retirees enjoy a lesser tax burden than those who work," goes the old story. That may have been true in the distant past, but it certainly is not true now. Today, many retirees end up in exactly the same marginal income tax bracket after retirement as before. That situation will definitely be true for those who follow a smart path in their retirement planning.

Nevertheless, retirees as a group do tend to pay the taxman less in absolute dollars than they did before. Common sense should tell us why: they have less taxable income. The money they live on usually comes from savings (taxable), pensions (taxable), and Social Security (potentially taxable in part). The addition of Social Security, which is never fully taxed, reduces the actual taxable income. Thus, a retiree could draw exactly the same annual income as she did when she worked, but pay less total dollars in taxes because part -- if not all -- of the Social Security income is received tax-free. Despite paying less dollars, though, that same retiree will still be in the same marginal tax bracket, albeit at the lower end of that range.

Throw some work in the mix and the plot thickens. Wages from work get taxed as usual. And, as we saw in Step 8, Social Security is trimmed as the retiree exceeds the maximum earnings limit for the year. In extreme cases, work could cause a confiscatory tax of over 80% on those wages when ordinary income taxes are added to the Social Security forfeiture. Kind of makes one wonder why a smart investor would want to work under that scenario, does not it?

If you are looking for a greatly reduced tax burden in retirement, well, forget it. The best you will achieve is a lower average tax rate on all the money flowing into the household for the year. Compute that rate by dividing your total taxes by all of your income, both taxable and nontaxable. For many retirees, the significant proportion of that income represented by untaxed Social Security payments does indeed cause the average tax rate to drop.

When and how does Social Security get taxed, you ask? The computation, like all Internal Revenue Service requirements, is a tad complicated. In fact, they have a special worksheet just for that purpose. The math starts with your Adjusted Gross Income. To that you add one-half of all Social Security benefits and all unearned income received during the year. The latter almost always comes from tax-exempt interest received from municipal bonds (a favorite retiree investment). If the computed total is larger than $25,000 (single) or $32,000 (married filing jointly), then up to 50% of the Social Security benefit will be taxed. If the amount is larger than $34,000 (single) or $44,000 (married filing jointly), then up to 85% of the Social Security benefit will be taxed. To determine the exact amount that will be taxed, you must complete the handy-dandy worksheet supplied by the IRS for that purpose.

OK! Now we know retirees have to pay taxes, but don't they get any breaks? What happened to the senior citizen discounts? Surely the government cannot be that cruel. I remember Gram and Gramps each getting an extra personal exemption because they were older than age 65. That just has to be there for today's retirees right? Well, actually, no it is not. It is true that exception did exist at one time, but it got wiped out during one of the efforts by Congress to "simplify" our tax laws. Our leaders left something in return, though. Currently, those over age 65 who do not itemize deductions on their income tax return get a higher standard deduction than a similar filer who is younger. The amount varies each year just as the regular standard deduction does. It is not much, but at least it is something. Provided, that is, you do not itemize on your tax return after you retire. Retirees who itemize get nothing.

There is one more situation in which retirees possibly can lessen their tax burden, and that is in the area of real estate taxes. Many states will grant real estate tax exceptions to homeowners of a specified age, usually age 60 or older. These exceptions vary and may take the form of a partial exemption, a waiver, a freeze on assessment rates, or a suspension of payment until death. For those pressed for income, investigation in this area is definitely warranted to determine what the state of residence will permit. While it is highly unlikely the tax can be avoided completely, it is equally true that when cash is tight, every dollar counts. In financial situations like that, every dollar not given to the taxman is a dollar earned.

This step showed that, "Only two things are certain: death and taxes."

In Step 11 we will look at The Big Day (your last one at work), and how you should handle one of the more important retirement decisions.