In talking with friends—yes about taxes and death—one may have mentioned their largest “spend” last year was for taxes.

I wanted to say “congratulations.”  Ironic response I know, but fully in line with the thought of “income taxes are from taxable income, congratulations on having so much income.”  Our household is not that lucky—yet.

We tend to have VERY low taxes because we have low “income.”  We are a “low income” household.  I have been known to call our life TrailerFI.

I’ll share some quick “income” thoughts.

Earned income

This is work in exchange for taxes, savings, spending, and savings.  Notice the default order of your paycheck flow.  The more you earn, the more each category’s possible amount.  Not usually applicable in “retirement.”  I do love putting in some effort for a Playcheck.

Passive income

Money that comes in without your effort.  I’m not really considering rental real estate—the brass (golden?) ring of the FIRE movement.  I think of this more as dividends and interest.  There are also (hopefully) capital gains that invoke a strategic plan on when to claim Long Term Capital Gains if the future is similar to the history of many returns and you have an increasing portfolio of assets.

Social income

It seems there are plenty of articles and research papers showing the granddaddy of income streams for many should still be flowing into our checking(?) accounts in retirement—Social Security.  We have a few ways to manage the amount of our monthly payment—work history and claiming strategies.

Some people have worked for employers that set aside money for the employee’s future in a defined benefit plan.  A wonderful precursor to the defined savings plan many of us were shifted into.

Deferred income

This is the one “income tax” most retirees feel is a cost (not spend) that they must or can try to manage. 

When “saving” for retirement in tax-deferred accounts you were removing that income from that year and setting it aside avoiding income tax.  That set aside account becomes a joint ownership between you and the government entities of your life when you un-defer the income and take distributions (either qualified or non-qualified). 

The complex part of the equation is you do not know the rules of the tax rate on that contract in the future.  As we see with Secure and Secure 2.0, we don’t even know the rules for the required distributions.  The government has the lawmakers that are changing the rules on those accounts’ contracts.

This is one reason so many people are doing Roth conversions right now.  We know today’s rules/laws and many want to lock in today’s tax rates.  This is even the case for many high “income” people in higher tax brackets.

Spending

I will close with “spending” is what you do with your money to non-government entities.  Shopping is spending.  Gifting is spending.  Donating is spending.  But income taxes are income reduction because, with zero income, you’d pay zero “income tax.”

Final thought – Use It

This one is hard.  I’ve read over and over and over…don’t let the tax tail wag the dog.  Don’t let having to pay an income tax determine how you live and spend. 

I’m working to break this tendency to try and optimize my taxes and our spending.  I’m working to sell more LTCGs to fill our multi-year (5?) cash floor.  I’m working to line up free cash for our MoJo Fun Bucket.  I don’t want the hassles I’ve encountered in the past year or so trying to decide what to sell to raise Fun Funds. 

It feels so much, SO MUCH better knowing the Fun Bucket spending is sitting in liquid assets.  It’s just a coincidence those assets are getting a nice “savings rate.”

Don’t try and optimize finances all the time.  Try and optimize living your amazing life.

*** Nothing in this article is to be construed as financial advice.  I am not a financial planner, nor do I pretend to be.  You should always consult your own professional when seeking advice. This post is not a piece of literary mastery, just a random thought I had.