Standard Deductions

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Thank you. Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Shile, CFP, sell insurance.

This show does not offer investment products or investment advice. Well, it's certified financial planner Hans Shile. Today's show, we are talking standard deduction, which, you know, we're talking taxes here and what is the standard deduction, but you may think, well, that's just standard. But as we have discovered in so many things, you know, it takes counsel. And so as I was thinking about this, my good friend Hans and I were talking about it. He's our certified financial planner that in the 13th Psalm, King David starts off by saying, how long will you forget me, Lord, forever? And then he says something very interesting. He says, not that that wasn't interesting, but this is particularly interesting of this subject today is how long will I take counsel in my soul having sorrows in my heart daily? In other words, what King David is saying here is, God, I need your counsel. But even more, you know, I need your counsel when it comes to the things that are described as far as my salvation, but it also speaks to how often do we need counsel for things we think we understand? And just as I watched actually your video, Hans, on the standard deduction, I immediately saw, wow, I didn't know what that had happened to the standard deduction for people my age at 65 is more than for people that are younger.

Well, it is. I mean, so the, you know, the tax code, there's some benefits to being a senior citizen. So I guess you're learning about them. Now that you're 65, I'm mighty close. And one of those is that the standard, the Mary filing jointly standard deduction is $25,100. So any age, you have a couple, you got two incomes or one income, you get to just put down your tax return $25,100 of deductions straight up without even listing and itemizing. Now, when you're 65 and over, they add 1,350 bucks to that. So the number for people over 65 is 26,450. Pretty close, but you know, I would just want people to get the point is that this is in the Tax Cuts and Jobs Act, which took effect in 2018.

So we've now we're living in the fourth year, the fourth tax year of the effect of the Tax Cuts and Jobs Act. And you no longer need to itemize your deductions unless they're over that number. Now for a single person, that number is $12,550.

So like my 23 year old son who just started his first job, he, I think he is just amazing to me, I think he makes about $75,000 a year for his first job as an engineer out of college, which is fabulous. I got him all started out in a Roth IRA, but he owns no home. I think he gives some charitable contributions. But he's just got no deductions, but he gets to put down $12,550 on his tax return for 2021. And that's how much tax free income that he's entitled to. So now somebody who's 65 and over and single, they get an extra $1,750 or the number is $14,250 of deductions, you just get to put that down.

It's like putting down 100 on a test where you didn't even have to take the test. Okay, or they're giving you an A on it because now, for somebody that has a big house payment, big mortgage interest payment, they get big state income taxes that they need to take off, they need to deduct where they're paying on a large income, and then they're paying property taxes. I don't think they can be more than $10,000.

So but still, and then they give a lot of money to the church and it's charitable. Well, obviously, there's people with very high incomes or higher-ish incomes that are going to take more than the $26,450 or the $25,100. But what I'm really looking at for people is when we when we start planning in retirement, we want to know how much income can we have besides Social Security and not pick any tax. Okay, that's because when you pay no taxes in retirement or very low taxes, that means you get to keep all your money and spend it or you don't really have to save money in retirement.

That's kind of over with. So when you add two Social Security checks, and, you know, a couple thousand dollars a month out of withdrawals from your IRA, essentially, you've got some pretty good levels of tax-free income that you can live off. Right. And so that's the relevancy of like, you may think, why is this standard deduction, you know, something I need to consider, but, you know, clearly, especially for people that are living in retirement, and this is, you know, it may be your parents or somebody like that if you're listening, those people that, you know, their primary source of income is their Social Security, which is not taxable, then wow, with that big, huge standard deduction, which they give you when you're 65 or over, then, you know, this gives you the opportunity to get some of that money right out of your IRA and not pay tax on it. Well, yeah, I can't tell you the number of people that I have that are pretty much living off their Social Security, and they have money in an IRA. If they're under 72, they're taking nothing out of their IRA because they don't need it. They're living off their Social Security, and they're just thinking they're doing a good thing because they don't pay any taxes. So they take nothing out of their IRA, or they get over 72, and they just take the minimum distribution, which doesn't add up to a whole lot, and then they leave the rest in there, and it's just rolling over, and they're unaware that they could be taking 26,000 out of their IRA, or 25,000, or if they're a single person, you know, 14,000, creating the income to take advantage of this standard deduction and get the income tax-free, even if they just put it in the bank, where it's now over on the side, we're already paid tax on the money. So people, most people are not really planning around this. They're not even thinking about it, and so I just wanted to raise awareness of it, because every person that we do a financial plan for, yeah, you know, many people, we do financial planning. They have incomes of, you know, 50, 60, 70, 80, 90 thousand dollars out of their savings, plus their social security, and so we're helping them juggle all these things, you know, proactively or prospectively, as opposed to looking backwards and just doing taxes of what already happened. So we're sitting down and looking at this, well, you're going to get a standard deduction of this amount, and people that don't do their own taxes, most of them they don't know. Yeah, I mean, and you have quite a story there about one of your clients that just continues to keep her records.

Oh yeah, and they're not very neat and tight, and they're all in a place in a box, and you know, during COVID, you know, I'm going over there and picking them up and making scans of all of them. This is just a lady that her husband died years ago, and I help her with more than just the traditional stuff. But in any case, she, you know, I have a CPA that does her taxes, but she's just given these things to me every year, and it's all her medical bill receipts and all her prescription drugs and all her charitable deductions and all her little bit here, a little bit there, her tax bills and her stubs for property, and it doesn't all add up to, I don't know, three, four, five thousand dollars at the most. And she gets a standard deduction of $14,250, and I tried to tell this to her a few years ago. In the middle of the process of hiring the CPA that I sent, I quit asking her that. I just take the stuff. She gets it ready.

I go out there during COVID. She sets it out in her garage, you know, I guess with gloves on, and I pull up. I did that actually two years, and then I pick it up and, you know, I go make copies of all of it, and then I think I sent them to the CPA just so I've done what I said I was going to do, but he absolutely doesn't need them. And I tell him, I said, you don't need all this stuff, but I'm sending it to you so I can tell her that I sent it to her, and then I take the box back and leave it in her garage. Again, it's just, it's nuts. And, you know, then I have to, every year, I have to go to her and force her to take the difference out or the standard deduction out of her IRA just to make sure that she has the income so the tax deduction means something.

Does that make sense? Oh, yeah, absolutely. And, you know, as far as, you know, starting to take the distributions, right, this even affects people in their 60s, right?

Well, sure. I mean, once you're 59 and a half, and you're not paying the 10% penalty for early withdrawal from your IRA, and then you get to be 62-ish, 63, 64, 65, and you get ready to retire, and you do retire and you start getting a Social Security check, the Social Security income doesn't enter into the standards deduction. So, if people have a Social Security check or a married couple's got two of them, and then a lot of people just kind of live on that because they don't owe much tax of any at all on it.

And then they got money sitting in an IRA and they're just going to wait to take something out of that. My advice is probably take more than the $25,000 because, you know, the first initial tax bracket is 10%. So, you know, once you get over the 26,000 of income or 25,000, you're over the standard deduction, then paying 10% tax on that is not all bad.

Even if you just redeposit it, or you can convert some of it, you can do a Roth IRA, and then you're showing the income on your tax return. You're getting advantage of the deduction, but you're getting the money over there that's available to you or your heirs tax-free. Wow, you can see this as a topic that's worth discussing because it affects really all of us. So, we're going to be right back. Remember, this show is brought to you by cardinalguide.com and CardinalAdvisor.

So, we'll be right back with more on the standard deduction. Hans and I would love to take our show on the road to your church, Sunday School, Christian, or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday School, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. And welcome back to Finishing Well with Certified Financial Planner, Hans Scheil, and our show today is the standard deduction. And getting some counsel is a wonderful thing, especially when we think we know what we're doing, which as King David will tell you, you may end up with sorrows in your heart daily. So, one of the places that that counsel is available is in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, which as we always mention is there at cardinalguide.com. But also you can just email Hans there at cardinalguide and tell him you want the book and inside of that book, right, there are seven different tabs or separate different sections based on what most people consider the seven worries, which the purpose of the book was actually that you wouldn't worry and so that you could enjoy your retirement. And one of those is certainly the idea of taxes and tax planning.

And that's what's relevant to us today, right Hans? Well, yeah, so we're talking about, we're really on the seventh worry. I put taxes at the last, it's the last content chapter in my book, simply because I don't like to start with taxes. We sit down to do financial planning and the first thing anybody wants to talk about, they want to lower their income taxes. That causes one to make poor investments.

It's not like we're not talking about them all along, but this is the last chapter. And what we're talking about today is just how the standard deduction, which used to be a small amount, now it's a fairly large amount, and how it was put in there into the tax code to simplify things. To just say, well, unless you have this much in deductions, you don't have to keep track of all this stuff.

You just put it down in your form. So when you get talking about the book, I wrote the book initially, just because I think that what we do in financial planning is fairly unique. There's not too many financial planners like me to talk about Medicare and long-term care and social security and all of those things. They're pretty much investment people. And just talking about your retirement income and investing your money, and that's pretty much what they want to do for you. And what I specialize in all of this specialize in all of these areas.

So I really came up with seven categories, seven worries, seven chapters, seven sections that just so I can categorize things, so I can explain to people like what I do. And I wrote the book so that people out there could read about what I do. And most importantly, they could share with their friends. They could say, well, I've met this guy and he did this for us and that for us.

It's pretty hard for people to share what we do to one of their friends. So they just give them the book. I mean, that was my thinking in the beginning. But what I realized is it really laid things out nicely for me so that I can just talk about this stuff almost endlessly. And these shows are going to go on for, at least I hope, for quite a while. And so the first one of those is social security. We have a show every seven weeks about social security. Next, Medicare. Next thing we're going to talk about is long-term care. And then IRAs and specifically the money you haven't paid taxes on yet. And then we're going to talk about retirement income and investments. And next is estate planning and life insurance.

And last but not least, the taxes. So it's pretty easy for me to just sit down without notes and talk to people and then individually help clients. We want to talk about how all these seven things apply to you and what your preferences are and what your goals are and really kind of how you want to live your life in retirement and how we're going to order your money and how we're going to order things and make decisions to make your life better.

So. To put one point of clarity in there, cause the word retirement always, you know, throws something in my, I guess, gullet. I don't know how to put it exactly, but cause it, it doesn't apply to me from the word itself because I have no intention whatsoever of retiring.

I do have every intention of finishing well, which is why we named the show that because it has to do with the change in, in the way that you handle your financial, all those seven categories are completely relevant to me. Because all the sudden as I turned 65, all of a sudden Medicare becomes part of my life. Social security is certainly a decision that we'll be making from the point that you're 62 or whatever, you know, clear till the age that you're 70 and the tax laws and tax differences and all those things, you know, that we're talking about life insurance and all those really are different for anybody as they make this change. You know, as you get into this stage of life, right? Cons.

Well, they are. And then people that delay retirement many times, delay making decisions. And then for, cause I share that with you, I'm trying my best to work into my seventies and, you know, 80 good Lord is going to allow me to stick around and do this. And well, I haven't delayed the decisions of like how I'm going to prepare for retirement and how things are going to work tax wise. Cause I'm, I'm going to get a social security check at 70, whether I need it or not, give it to the church, nothing else, give some of it to my grandkids. I mean, I, my kids are, I mean, so that's, so I better plan out the taxes and you know, then I get to think about things may not work exactly. The Lord may have a different plan for me. I mean, I, I may be sick, I may die. And then my wife is going to live on and she's, we need to take care of her. And so you've got all these contingencies that you want to plan for. I may get, I may work a long time, but I may be doing some of that disabled. And if that's the case, I would just want to make sure that everything and everybody around me is fine.

And it's the best it can be. And then I can get care in the way I want to get care. So this retirement planning is not something that can be put off just because you are working and you haven't done that personally.

I haven't done that, but I, I run it. We, we have a lot of new clients come in and they're in their seventies and you know, you're not going to get a lecture from me. Like, why didn't you come in here 10 years ago?

Believe me, you won't get that. You're going to get an applause because some people never consult somebody like me and they just face these things as they happen. And, you know, then they're saying to themselves, boy, I really wish I'd have lived into that when I could have done something about this. And so the whole idea of retirement planning, probably best to start preparing for it in your fifties. I'm thinking about it and it'd be fine to consult me in your fifties. I mean, the early sixties, mid sixties is when most of the people are coming into us and then beyond there still come into us to just understand that if you're in your seventies and you really haven't gone through these seven things and have a plan in place, then it's probably not a bad idea to get into me or somebody that liked me and get a little advice.

Yeah. Again, as, as in my case, which I hope to never retire still, as I reached the age of 70, like you said, social security is coming, whether you want it or not, which I do want it. I'm looking forward to that and I'm sure I'll find a place for it, but then also, you know, obviously if you've got IRAs, you got Roth IRAs, all these things change and, and really some really cool things happen as, as a result of, of that, um, that really are beautiful. Like, you know, if you're my age, if you're 65 and you're still working a Roth IRA works really, really good because I mean, you can just put money in there and, and, and make the, and make the income. But those things I learned only as a result of having, you know, done these shows with you Hans and, and reading the book.

Sure. And, you know, retirement planning is really about your eighties and nineties. You know, this really hit me as you say, well, what does that mean? Well, I'm only in my sixties. Well, yeah, but you could not do retirement planning for most people and just kind of pay things as they come, collect things as they come, pay your taxes as they're due, do your minimum distributions. You're going to be fine all the way through your sixties and seventies where the problem comes in is if you live into your eighties and nineties or one of you two does, now we start running into the negative ramifications of these things. You know, if you didn't plan for an early demise of one of you and the survival of the other, well then that really matters in the eighties and nineties when you're living off of one social security check. If you didn't plan for long-term care and it's happening to you in your eighties and nineties, well, there you go. I mean, so, so much of this whole process is really about the eighties and the nineties and understanding that your sixties and your seventies part of retirement, you're probably going to be all right if you don't plan at all.

Right. And then there's still your heirs and your spouse and all those things that figure into the equation. And even as we're talking about today, the standard deduction, uh, is, is part of right, I guess, creating a runway so that the landing comes in without so many taxes. Well, it does.

And when the first one of you passes away, that thing cuts about in half. So from an income planning standpoint and a tax planning standpoint for the older ages, I mean, we project all this stuff out and we don't, you know, we, we try to make decisions now prepare for decisions in the future so that you can be smart about it and prepared for it. So as, as we get back to that, that concept, um, when we're looking at a standard deduction, so people from 59 and a half on up and right, we can be right. You're going to get the standard deduction your whole life. And you're getting it now where you have a working income. And if your income is more than that, you don't really need to do a lot of planning in the immediate. It just, it comes in is once you start getting your social security, you're going to have a low tax or possibly even a no tax situation with your social security check of your income coming in. And that's, you know, that's part of what you're living off of. And then if you have retirement savings, which many people do, and many people who come to us do, and that's your other source of income and you're in control of the withdrawals from that. And so a lot of folks think that, gee, I should just avoid paying, taking any money out of that and just save it for later and not paying. Then I'm also avoiding income taxes. And you are for a while, but you're also, if you're not pulling anything out of that IRA or 401k until you have to, you're, you're wasting away years of standard deduction where you could have pulled money out of there and it was effectively tax free.

You know, there's all sorts of wonderful things that you can do, even like you mentioned with the QCD in the last show, right? Yeah. I mean, your 2021, let me go over one other point that I thought of is that your 2021 tax deduction, if you are a married couple and you're over 65 of 26,450 has a 365 day shelf life. And actually your 2021 one has right now, when this radio show is playing, uh, about three months of shelf life. Okay. And if you don't use it, if you don't show income of that amount, um, by January 1st of 2022, it's wasted, it's gone by, it's spoiled.

And then you'll have another one start that year. So don't let the years go by where you're not using the standard deduction. And the other place that you had just mentioned is the QCD is there's a way there's a way to donate money to, which for the purpose of this show, the church or any other qualified charity directly from your IRA and avoid taxation. Okay. Now I don't want somebody doing that. And you told me I could do that.

No, I just, I want you, there's a whole lot of rules that follow around that, but so if we're using a standard deduction to lower our income taxes, but then we also don't want to cut back on what we're given to the church, but we want to give more. We can do that if you're over age 70 and a half through a QCD. And if you want to know more about a QCD call me or go back and listen to the podcast on previous shows, which you can find all that at the cardinal guide.com. Um, as well as, you know, cons this book, as we talked about the complete cardinal guide to planning for and living in retirement, uh, it's all available there at cardinal guide.com.

Well, great show Hans. Thank you so much. Thank you. Finishing Well is a general discussion and education of the issues facing retirees, cardinal guide.com, cardinal advisors, and Hans Shile CFP, sell insurance. This show does not offer investment products or investment advice. We hope you enjoyed Finishing Well brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans best-selling book, the complete cardinal guide to planning for and living in retirement and the workbook. Once again, for dozens of free resources, past shows, or to get Hans book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.