Top Misperceptions About Taxes

Forbes

31-07-2025

Josh Strange is the Founder & President of Good Life Financial Advisors of NOVA. The firm works with federal employees and contractors.
The U.S. tax code is maddeningly complicated, making it difficult for most to navigate it effectively without professional help. Making matters worse is that tax laws keep changing.
Therefore, it's not surprising that numerous misconceptions and myths surround taxes, which can lead to costly mistakes. Perhaps the biggest one isn't a single misstep. Rather, it's a mindset: Most tend to view taxes as a single transaction each year.
The reality is that managing taxes is an inescapable part of wealth planning, one that requires a long-term strategy that accounts for today, tomorrow, a decade from now and beyond.
With that said, here are four common tax misperceptions:
1. I'm in the 22% tax bracket, so my annual income is subject to that rate.
People often fail to understand how the tax brackets work. The system is progressive, meaning, in reference to the above, only a portion of your annual income is taxed at 22%, not the entire amount.
For example, if you made $58,000 in 2024, the government taxes the first $11,600 at 10%, the next $35,550 at 12% and the remaining $10,850 at 22%. Minus deductions and credits, that would come to $7,813—18.7% of your salary and significantly lower than what you'd owe ($12,760) if all your income were taxed at 22%.
For all the griping about taxes, a lot of people pay less than they think, thanks to this miscalculation of the tax code.
2. I will be in a lower tax bracket in retirement.
On the surface, this is a reasonable assumption. After all, no more employment income equals fewer taxes. And for the most part, this is true, with research suggesting that retirees have lower tax rates than they did during their working years.
But it's not always the case. Several factors can boost your tax bill in retirement. Take required minimum distributions (RMDs), which are taxable.
Let's say you have a $2 million IRA when you turn 73, the age at which you must start taking RMDs. The good news is that you saved and invested well enough to be reasonably wealthy in retirement. The bad news is that you will be taxed like it because an IRA of that amount comes with an initial RMD of about $80,000, which could push you into a higher bracket.
The issue becomes even more acute if, on top of large RMDs, you also have a pension, an annuity or significant capital gains—all of which are also taxable. Further, keep in mind that depending on your income, up to 85% of your Social Security benefits can also be taxable.
3. You can mitigate estate taxes, but you can't eliminate them entirely.
If your estate is valued at $13.99 million or more at the time of your death, you will owe taxes on it. However, not many estates are worth that much, and virtually no one pays taxes on them.
However, even wealthy individuals and families can avoid estate taxes with proper planning and forethought. Currently, it's possible to give as many people as you want up to $19,000 each in a single year without them having to pay taxes or it impacting your roughly $14 million lifetime estate tax exemption (for married couples, those numbers are $38,000 and about $28 million, respectively).
Many states, like Virginia and Florida, don't have estate or inheritance taxes at all. However, most do, and the exemption amounts are typically lower than the federal one. For instance, Oregon taxes estates valued at $1 million or above.
4. Paying more taxes is always a bad thing.
Nobody likes paying taxes. In fact, getting a refund is often a cause for celebration, even though that's the equivalent of providing Uncle Sam an interest-free loan for a year.
However, a higher tax bill suggests that good things are happening. For example, it means that your income, whether from your job or investments, has substantially increased. Given the choice between paying no taxes and earning more money, I suspect most people would opt for the latter.
In truth, paying more when you're younger is sensible if it means paying less when you're retired, and, ostensibly, have a greater need for the money. Some of the above examples (e.g., drawing down your IRA strategically to avoid big RMDs) are a testament to that. That's lifetime tax planning, and it's just as important to a long-term financial plan as anything else.
People dislike taxes. A lot. Part of it is natural: Who likes giving up money? Another reason is undoubtedly that the tax code is so multifaceted and complex.
Working with a financial advisor can help demystify taxes, enabling you to craft a long-term tax strategy that can increase your wealth by reducing the amount of taxes you pay over a lifetime.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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