So today's Cardinal Lesson, we're talking
about the 2022 Income Tax Rates for Retirees. And you know the rates are the same for
people under 65 as they are over 65, but income taxes in general are going to play out
very much differently for people in retirement than they do while you're working. So we're
going to talk about, so so why does this stuff matter? Is, these are the current tax
brackets for both the married filing jointly, um and for the single. And the the tax, but you
can make a lot more income together as a couple, and pay at a lower rate, than a person by
themselves, okay. So when we're planning around tax rates, and that's what we do is
financial planning, retirement planning. Where we're sitting down and we're right in
2021- the end of 2021 and coming up on 2022- and we're going to plan out probably through 2030,
2040, 2050. I mean the the numbers get less exact when we get past five years, but we want to look
at the potential for the whole of retirement. And when we're talking about a couple,
we're also going to plan for the fact that one of them might pre-decease the other by
a lot of years. So if we have the one spouse pass away at 80, and the other spouse live on to 90-95.
Then, we have a lot of years as a single taxpayer for that person, for the widow or widower.
So you say, ‘Well what does this have to do with anything?’ Well it has a lot to do for
retirees, because when you've been working, most people view this stuff as pretty much
out of their control. It's like I'm going to be in a certain tax bracket, and I'm just there
because of my work, and because of my income. So a lot of tax bracket stuff is a history lesson.
I mean you're just in April, you're looking back when your CPA or your Tax Preparer does your Tax
Return. You're just looking back. Do I get some money back or do I have to pay money? Because
of what happened in the past, there's nothing we can do about it. What we do as financial
planners is we sit here and we're looking now. First of all, is there anything we want
to do for our retiree clients during 2021- what's left of it. To perhaps increase their
income for this year. And go ahead and pay some tax to make future years better than they
could possibly be. And then what's the plan for next year? And the year after that, and the
year after that? Because when you're retired, if you have money in a 401K or an IRA or some
type of Pre-tax account, you are in control of when you distribute that money to yourself
and pay taxes on it. And you say, ‘Well duh, I I kind of knew that.’ Well you know it is a duh
that you're in control, most people know that, but the general philosophy that most people have
coming into me is I want to pay as little taxes as possible every year. And specifically this year.
So if I have a choice between paying more now and less later, or less now and more later. I'm going
to take the less now and more later. And that's what people have done, and that's why they'll have
a big account. But when you shift into retirement, now that's what that account is for, is to
distribute it to yourself over your retirement. And you don't want to distribute too much, because
if you spend it all- what's left after taxes- you're going to be out of money when you're
80 or 85. And we certainly don't want that. But when we do planning, we don't necessarily plan
for the spending of all of the net distributions. Some of that you're going to spend and
live off of. But there's many times a big balance of that that we're going to convert
either into a Roth IRA or a Tax-Free Account, that stays Tax-Free for the rest of your
life. And to your heirs. Or we're going to do, and or we're going to do a combination,
where we're going to buy some Life Insurance that is going to be there because it's going to
be Tax-Free to the beneficiaries. And it's also through the accumulated tax cash value, you
can borrow some of that money if you need it Tax- Free. So there are a lot of advantages
in Retirement Planning to paying taxes now, to reduce taxes later, or to
create more of an ideal future. So when we're sitting down with a lot of couples- um
just had some in this week. Where we're, you know, they're looking and we're looking in people-
a lot of times in retirement or anticipating retirement- are going to find themselves
either in the 12% bracket or the 22% bracket. Somewhere in there. And a lot of them
haven't really stepped back and said, ‘You know that's a pretty good rate.’ I
mean you've got to add State Taxes to that, and if you live in a High-Tax State. That could be
a lot, some of you have chosen to live in a No-Tax State. And so the Federal Income Tax
is pretty much all you're dealing with. So you look at this, and then you say ‘Well how
high could I raise my Income, and how much Taxes would I have to pay on that raised amount?’ And
this is where we get into the Roth Conversion game, where people take a look at this. And we
just had a guy in here, a couple in here this week, that it was kind of like a no-brainer.
That they're gonna, they were in this category right here. About a $120,000 is what they need
to live off of, of income, in all the planning. And then we have just put together a plan, where
they're going to go ahead while it's still 2021, and they're going to convert about
$220,000 into a Roth of their significant IRA or 401K Balance. So then he wanted to
take it to the next level. He said, ‘Well what would happen if I went to the top of the
32% rate?’ So it'd only be on that extra $90,000. They would pay 32% Income Taxes.
The other taxes would be the same on the Roth Conversion and so on and
so forth. So we're able to look ahead and plan out Roth Conversions according to where
they want to fit on this tax thing. And you say.. I have some people that listen to this or look
at this, including my own CPA, and just said, ‘What are you doing? Why would you choose to
pay this much tax now, when you could just avoid it for another year, perhaps many years?’
And the answer to that is paying taxes now for some people- this is a personal decision- allows them to have the money over in a Tax-Free
Account. I'm not talking about tax deferred, I'm talking about Tax-Free. So as they get into later
retirement, they have this increasing account that has no minimum distributions on it: is
called a Roth IRA. All the growth is Tax-Free, and so they can access that money later in
retirement. And they don't have to show it at all in their Tax Return, okay. Really nice
and especially if you've got the survivor, the spouse that lives the longest, this is a
single taxpayer. It's.. it's a nice it's it's a nice situation. And then if they don't access that
money and they pass it on to the next generation, the next generation, or their kids, their
adult kids are going to inherit this money out of a Roth Tax-Free, if they're
successful. On the other hand, of avoiding the taxes and just rolling it,
and then they pass along a large balance in their account to their kids. Their kids, in
order to access the money are going to have what's called a Tax Bond, and they're going to pay a
huge amount of taxes from a lifetime of work, all at once. With some proper Tax Bracket planning,
especially when you're in your 60s, you know and you do that all the way up for quite a while and
you get this moved over into a Roth, then you're going to have a tax-free account available for you
and your spouse. And then ultimately to pass on to your children, and it's all going to be
Tax-Free. So that's the biggest place that the rates come into being prospectively, where
we're looking at this going forward. Now for the rest of us that don't have these huge balances,
and they don't have these gigantic tax problems, they're for people that have their Social Security
check. They have some money in a traditional IRA, but yet they, they don't have enough that
they're going to play the Roth Conversion game. Although, sometimes it makes sense, but a lot
of people are just, ‘Well I don't really have enough of that. So I just want to plan this
out, but I still want to plan out my taxes and my distributions in a way that makes sense.’ So
it isn't all about Roth Conversions. It can also be about just simply having a significant income
that comes into you. And that significant income is really where there's no taxes
on the significant income. And a lot of this comes through the Standard
Deduction. This is something that was passed in the Tax Cuts and Jobs Act (TCJA). Where the
government was just giving you a certain amount of tax deduction, or deductible expenses. Everybody
just gets to put a big number on their return. Now if you have more than that, then fine you're going
to deduct whatever it is you have. But when you look at people over 65, a married couple, you get
to put $27,300 of deductions on your tax return. Just no matter whether you have them or not. And
about the only thing for most people that would go on the deduction area is Mortgage Interest, and
that's limited now. Taxes, Property Taxes, Real Estate Taxes, and then Charitable Contributions.
And you know it takes a lot to exceed this $27,300. Or another way to look at it, let's just
say that people have been going along and they've got $10,000 of all that stuff I just named. Well
instead of putting $10,000 on their Tax Return, they're able to put $27,300. And for a single
person, that number is $14,700 for people over 65. So, why does that matter? Well, first of all, your
Social Security- which you receive every month, and if you're not receiving it yet, you will at
some point in the future, because you'll elect to delay. That doesn't get, that, the taxes on
Social Security are calculated by your other income. So when we have people that are down in
these brackets, right here. There's some real good that we can do for people to get their Tax
Bill very very low. And we can do that through having strategic Minimum Distributions, okay,
and I don't necessarily want to get into the math of all of this. But there's just a lot
of people that are, you know, perhaps making $50-60-70-80,000 a year in retirement,
including their Social Security. And they really don't realize, if they're a couple, that they have
this kind of Standard Deduction. And, which pushes them down into these lower tax brackets, and
then you start applying the percentages to that. It, it you know, it's a very low amount and then
you apply the Social Security formula. We have a lot of people in retirement that just don't pay
much in Taxes. That's a good thing, but it still requires some planning to get there. And it also
requires some planning, that if the Savings that they do have is over in an IRA- and a lot of folks
are looking at that as their Savings Account. What we don't want is all of a sudden, they have
a future year where they need a hunk of money for some emergency. Perhaps something for their
kids, something for their house, just something where you got to come up with a big bunch of
money. And you go draw that out of the IRA. And because it's there, you throw this whole
thing into a mess in a future year. So, we we like everybody, regardless of your level
to to slowly start moving some of that money that's in an IRA, a Taxable IRA, into
either just a Savings Account or a Brokerage Account. Or to get it over into a Roth
or some Life Insurance Cash Value that could be borrowed on. Something where you can go access a
hunk of money and not throw your whole tax plan out of sync. So if you're a married couple, you
got $27,000 that you just put down as Deductions. For a single person, almost $15,000. And
I can't tell you the number of clients I have that keep track of all the stuff, all their
Charitable Contributions, and they keep track of all these receipts that have been historically
deductible. And they don't add up anywhere near to this amount, and they really don't understand
that. So if people get that out of this video: is you you really don't need to keep track of
that stuff, if it's not anywhere near here. And it's all, it's all in your Checking Account,
anyhow. So, then let's move on and let's talk about Long-Term Capital Gains and Qualified
Dividends. So what what what applies here? I mean, so generally speaking, if you incur
Capital Gains you're going to pay smaller Taxes on the Capital Gains than you would over
here at ordinary Income Tax Rates, okay. Now when you look at this thing from:
$0 to $83,350 of Adjusted Gross Income. So if if your Adjusted Gross Income is less
than $83,000. Your Capital Gains Tax Rate and your Qualified Dividends Tax Rate
is zero, okay. Then you go from $83,000 to $500,000 of income, which covers a whole lot
of people, capital gains are at 15%. And 20% is for the people over that, in Adjusted Gross
Income. So we have a lot of retired people that are sitting on property, perhaps a farm. Not
going to get talking about your house today, but they're they've got some significant
asset: either a farm, or a business, or something that they own, or they inherited
that they really could use the money from that to fund their retirement. And yet
they don't want to sell it. Their kids don't want it in an inheritance because if they
kept it till they die, their kids are going to get a Stepped-Up Basis. They're going to
inherit it without having a Capital Gains Tax. But when the stars align properly and people's
Adjusted Gross Income is from here backwards, okay. For a couple, or here, so they're in
this category. We can make a sale in current Capital Gains and pay taxes at the 0% Capital
Gains Tax Rate. So I don't want anybody making decisions off of a video. I'm just trying to
give you a taste of the things that we do. So we look at all this stuff when we're
planning out your income streams and your retirement income planning. So I'm Hans
Scheil and I thank you very much for listening.
