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Enjoy it, share it, but most of all, thank you for listening and choosing the Truth Podcast Network. Well for over 40 years on Finishing Well, we'll examine both biblical and practical knowledge to assist families in Finishing Well, including discussions on managing social security, 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. Welcome to Finishing Well today with certified financial planner Hans Shile. Today's show, very fun. You wouldn't think it was fun to steer the title, but it is, I promise.
2022 tax rates for retirees. And so it really is kind of cool. We get some breaks and we get some neat stuff.
So here to help us out with that, of course, we've got our certified financial planner Hans Shile. But before we get there, I want to just share this Bible verse with you, which, you know, I love to do this and this one tickles me because it's Ephesians 2 10. And you might know it reads, for we are God's handiwork created in Christ Jesus to do good works, which God prepared in advance for us to do. And so when you think about that verse, preparing in advance good works, you know, you can't help but think that God has literally thought of these things ahead of time that he wants you to do for your family and retirement and finish well. And he, you know, is just holding you over the basket wanting to make you a dunk shot. So what he did was he allowed you to listen to this show today so that you could be prepared in advance.
But also is the Christian car guy. Let me just say this a minute. Okay. When I think about this idea of taxes, it reminds me of that old Midas muffler commercial, you know, the repair shop where the guy says, Well, you can pay me now or you can pay me later. And you knew that that you wanted to pay it later.
It would get more expensive. And so I think you're going to be excited about preparing in advance as we talk about these tax rates, right? Well, yeah, these come out in November, usually these were on time is the tax brackets and tax rates for 2022. The brackets are the only thing that changed the rates remained the same, but the brackets grew a little bit and then the standard deduction increased a little bit. Generally speaking, for those of you that are not in retirement yet, or you're anticipating it or you're fresh in retirement, you're going to pay less taxes in retirement or you're going to keep more of your paycheck in retirement than you did while you were working.
Starting with the fact you don't pay Social Security taxes, which Social Security and Medicare adds up to almost 8% of every paycheck up to like 145 grand. So you're not going to pay that. Yeah. And from a planning standpoint, you know, when you think about that, I mean, it's significant.
It's real significant. Then you're not going to be contributing to your 401k or your IRA anymore. So if you were putting 10% or 15% or something into there, that's more of your paycheck. It wasn't really a tax, it was paying yourself. But some of it was taxed and you're not making that contribution, but you still are going to pay federal taxes and you're going to pay state income taxes. Unless you live in a state where there are no taxes like Florida, where there are taxes, but they're not income taxes in Florida or Texas or Nevada or somewhere like that.
And so since 2018, we're in the lowest brackets I've ever seen in my working career of doing this, which stretches back to the 70s. You know, like I'm looking in 2022 that the top of the 12% tax bracket is 83,550 of income. And that doesn't include all of your Social Security. It might include just very little of your Social Security. Right.
So just could change for a minute. I mean, oh my goodness. If you're making less than $83,000 after your standard deduction, right? After your standard deduction. Right. So you really are making $107,000.
Right. So after that, you're only paying 12, like 1, 2%. All those days of 30% is what a lot of people think is taxes.
No, we're talking about 12%. And the first $20,000, you're just paying 10%. So that amount may bother you, but compared to what taxes were like 30, 40 years ago, there's substantially larger percentages. And then still climbing, I mean, the top of the 22% bracket is 178,000, which after the standard deduction, that means you have a combined income of over $200,000. And the amount from 83,000 to 178,000, you're paying 22%. And you're still just paying 12% on the amount from 20 to 80.
So you can get into effective tax brackets. I don't really want to confuse people. And people don't look at this stuff for a reason. It's not all that interesting. I'm going to tell you a reason that people don't plan in advance that much is your whole working life, you've basically had no control over this stuff.
So why would you look at it? I mean, you don't have control right now over how much money you make this year. Maybe you have a little bit. You could go ask for a raise or something. But you pretty much know how much money you're going to make. And then you don't know how much tax you're going to pay, but you just trust that they're withholding the proper amount. And then every April, you got to go to the CPA and get the good news or the bad news. So it's just a history lesson. I mean, there's no planning there.
It's just calculating what is and squaring up with the government. When you're in retirement, you're going to have a lot more control over when you receive your money and when you pay taxes on it than you did while you were working, especially if you have an IRA account. Well, actually, to an extent, having been your disciple for some time now, as you get into your late 50s, early 60s, you now begin the process of that, right?
Yeah. I mean, you're just planning, okay, at some point, I'm not going to have a paycheck. But then right at that point or somewhere around there, I'm going to have Social Security. And then I don't know how much tax I'm going to pay on that, but I got news for you is your tax on that is going to be calculated by the other money you earn, most of which is going to come from withdrawals from your IRA account, which you control year by year by year. So people make errors on both sides of this deal where they have a year where they don't take out anything and they probably should have taken some out and paid taxes on it because they left money on the table at these low tax rates.
Or people do the opposite. They don't take anything out, they don't take anything out until they got an emergency or have a big need for money, and then they pull out a whole huge amount in one year and it drives them way up in the tax brackets. So my thinking is use these numbers, and I got them for 2022, but I can very easily project what they're going to be in 2023, 2024, 2025, and it's already baked into the law in 2026 that the tax rates are going to go back to what they were before the 2017 Tax Cuts and Jobs Act. So there's a planned increase in tax rates. It's already baked into the law. The Congress has to do nothing.
The President does nothing. These things are going to go up. So these lowest tax rates, if we dare call them that, have a timeframe. That's the pay me now or pay me later. In other words, you can pay 12% now on that money, come another IRA into another situation, or you could go back to 25 or 30%.
Well, sure. And for single people, the top of the 12% bracket is $41,000. The top of the 22% bracket is $89,000.
The top of the 24% bracket is $170,000. So still, there's some room, if you're living off of $40,000, $50,000, $60,000 a year, and you've got a pretty good-sized IRA, there's some room to make a withdrawal or do a robbery. So you're not going to have to pay a lot of taxes. You're not going to have to pay a lot of taxes. You're not going to have to pay a lot of taxes to save on taxes later. I'm not going to take that to the end in this show, but I'm just trying to show how this information, mainly for me, and just pointing out little bits of it is helpful for you, is that in retirement, providing you have a 401k or an IRA or your spouse does, of some significance, you have some choice year by year by year of when you recognize taxable income. So you have some control over your tax return and your cash flows and your tax payments. And then it begs the question, which a lot of people ask, my own CPA asks is, why in the world would you pay more taxes this year than you have to?
Why would you do that? Just very flippantly, I don't know, beats the daylights out of me is my answer to that. I'm not going to touch that with a 10-foot pole. I mean, you're already telling me where you stand on this issue.
That's just like an invitation to a debate. But still his point of view, and I'm going to tell you exactly why I'm going to do it, because the tax rates are lower, I'm leaving money on the table if I don't, and I'm thinking when I get later in retirement, all of a sudden I need some of this money all at once, and then my tax rates are going to be huge. Or I'm successful in just deferring it and having a big balance I pass away, and then the only way that my kids can get it there in inheritance is by paying a bunch of taxes. And so none of those outcomes are good, so that's exactly why I'm going to be methodical about this, and I'm going to paste these tax bracket rates on the wall, and then I'm going to create a schedule year by year by year by year of how much I'm out planning to recognize.
And personally, I'm already done with my schedule. I got all my IRA money is now in Roth. I've just paid the taxes. My accountant hasn't liked it, but I've paid the taxes, and now I've just got a pot of tax-free money that's growing, and the growth is tax-free. And I use these charts to do that.
I've just made hay while the sun shines. Right, and why that's so hugely important from my perspective, right, is that is you've got what you refer to different buckets of money, so I'm sitting in retirement, and I'm taking money out of my Roth IRA that's already been taxed. It doesn't change my income, and I pay no income tax in retirement, essentially. Well, yeah, and we also don't have... We have a stream of income that's not driving tax on Social Security. Right. So you get to that formula, too, and so my plan is to have two pretty significant Social Security checks, close to tax-free if not tax-free, and then have another stream of income that's coming out of the Roth or as policy loans out of my life insurance, just as big or small as I need it to be to supplement the Social Security, and all of it's going to be tax-free. So I only need to plan for net money instead of gross money. Ka-ching. So when we come back, we've got more of 2022 tax rates in for retirees.
I mean, very cool. So stay tuned. Of course, this is all brought to you by CardinalGuide.com. Hans is both the complete cardinal guide to planning for and living a retirement. Of course, this video is on YouTube at the Cardinal Advisors.
We'll be right back. 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. Welcome back to Finishing Well, a certified financial planner, Hans Scheil, my good friend and sometimes known as the GOAD. And today's show is 2022 tax rates for retirees.
And he's trying to goad us into this idea of you can pay me now or you can pay me later. And so you got a cool story, I think, about somebody who essentially when they saw what you were talking about and they went, oh my goodness, this is kind of a no brainer. This whole idea of Roth conversions, you know, is on people's minds now.
And perhaps maybe I could take a little credit that, you know, I'm driving them there through my videos and at least pique in their interest. Pretty much our rule of thumb has been with people coming in is we've been taking them to the top of the 22% bracket of a married couple when they've got a fairly large IRA, which was 178,000. You know, so you get people living off of maybe 80 grand or 90 grand or 100 grand and then, you know, 70 grand or whatever they're living off of. That's what their taxable income would be. And then we're converting like 100,000 to get them up to where they're paying 22% taxes on the Roth conversion.
Then some of the people would, well, what's the next higher level? That's not enough because they've got so much in their IRA and they can see a timeframe that they want to do more than that. So then we go to the top of the 24% bracket is 340,000.
And so we had a few people push up against that. And Tom's the expert in all this stuff. Well, the neat thing is you pointed out is you're not paying that on all the income.
You're paying 12% up to the 80 and then you're paying the 24. You know, it's just not that different. So we've just had, and God's sending us these people through YouTube. I mean, we've had lots of people with million plus in their IRAs and some of them multiple millions. And these aren't like your typical rich, have a whole bunch of money, made a high income, lived a high lifestyle. I mean, I can think of one particular gentleman who's, he and his wife, he's like a chemist. His wife is a nurse. And I think that their combined income was a couple hundred thousand dollars. So they're both maybe 250 in their best years where she was making 100, he was making 150. Yeah, these people have between four and $5 million in their pre-tax IRA and they have almost nothing in other savings.
Okay. And they're approaching retirement and they can pretty much live off of their social security. So, you know, we get talking to him and so, you know, it's like, what do you want to do about the taxes on this? And he's just, he's like distraught over this. This is just over all sides of it because he's smart enough to figure out that the government's going to get about half of this. You can pay me now or you can pay me later.
He's figured all that out. Well then, these people are from an Asian country and they, big importance on leaving an inheritance in their, in their, really in their culture. And, you know, I'm sensing that and I'm asking them all the questions and then I start showing them about the burden when kids inherit this. This guy's only in his mid-60s and his wife a little bit younger and so we got another 30 years to grow this with him not spending it and minimum distributions. And so he's going all the way up to the 35% bracket and doing Roth conversions and his, his, which for a couple is $647,850 is the top of the 35% bracket. And that means he'll pay 35 on some of the conversion, 32 on some of the other conversion, 24 and so on and so forth. But his goal is to get this all converted and through studying these charts and buying into everything we're doing, it's going to let him convert between $400,000 and $500,000 a year and he's going to do that for four or five years. He's still not going to have it all over there but, and he's going to pay a lot of taxes out of that because that's the other problem. He can't convert all of it because he doesn't have any money sitting on the sidelines to pay the taxes so he's going to actually have to pay the taxes out of the amount converted.
The whole goal here is to get it all over there or most of it. I explained QCDs to them, they're very charitably inclined and they're giving money to the church now and to missions and various causes and so, you know, I explained that we're going to, we're going to carve off some piece of this $4.5 million into like our QCD fund. So once he reaches 70 and a half, we'll start giving that away to the church and then make the church the beneficiary of that account so that if they die or maybe the secondary beneficiary because of the spouse, we might split it up because his wife has a lot of money in these things too. But the whole point of pay me now or pay me later and taking a little bit of pain of the tax and a little bit of the time and being thoughtful about this prospectively as opposed to just like hoping for the best and being bothered about a tax bomb going to your kids.
Right, right. And then as I was looking at your board and your video that they're at Cardinal Advisors under you too, you know, I saw something that, wow, that appeals to me. Like after you're 65, you get more and there's more like, oh my goodness, the standard deduction that goes up and I wasn't even aware of that.
But I guess my birthday is paying off for me. People, I do a kind of an informal survey on this all the time. Most people don't know about this big standard deduction that came in in 2018 as a result of the Tax Cut and Jobs Act.
I mean, they just don't. And for a married couple, the standard deduction in 2022 is going to be $25,900. And if you're over 65, both of you, it's going to be $27,300. So I tell everybody, what does that mean?
People say, I don't know. Standard deduction, I don't know. What that means is if your deductions, your tax deductions, which we're pretty much talking about home interest, home taxes, car taxes, property taxes, and charitable donations. Is medical in there or something? Medical is in there, but it's confusing and it's got a threshold of 10%.
So let's leave medical out of it for now because it's unreimbursed medical and most people have insurance to get it reimbursed anyhow. So it's really those things, your home interest, your mortgage, your property taxes, and your charitable contributions. If they're less than $27,300, then you don't even need to keep track of them because you just get to put down on your tax return $27,300. Right, which gets back to those brackets. You know, when you put that in conjunction with one another as I was looking at it, because I'm sitting there and going, okay. So, you know, if I'm trying to get down below $80,000 and I've made $107,000 or whatever, all of a sudden that $27,300 standard deduction, if you're over 65, you and your spouse, Keqing brings you down to where like there you are, you're only, and so it's actually.
That's why it was called a tax cut and it was really tax simplification because if your deductions were less than that, you don't need to keep track of them anymore. I take that now because I don't have that much. Okay. And so. And you're not even 65 yet, so you haven't got to the big one. Well, you got it.
And so I want you to be aware of that. And for a single person 65 and over, it's $14,700. For a single person, like my son, he doesn't have a home mortgage. He doesn't, you know, have property taxes, I guess a little bit on his car. He gets to put down $12,950 of deductions when he doesn't even have them. I pointed this out to him. I mean, that's pretty good. And then he got a nice salary for just coming out of college, being an engineer.
I don't know, he's up around 80 grand. I mean, that's pretty cool. And, you know, his top tax rate is going to be 12%, but they're going to deduct this first. And so this whole thing is better. And then, you know, the sad part is it's going away in 2026 unless they change it. And that's just how they do tax laws.
So, you know, this is now kind of get now while the getting is good. And so I'm not just saying Roth conversions for everybody, put yourself up here in this. I'm just saying that when we do financial planning for people in retirement planning, income distribution planning, we sit down and we get out this chart, and then we talk to them, and we talk about what they want the inheritance, and, you know, we look at what their Social Security.
So we look at their specific situation and we start making distributions with their approval. So it's distributing money to themselves and paying the taxes under a logical format so that they will increase their after-tax money, and they'll decrease their before-tax money as they go into retirement so that later in retirement you've got access to a tax-free source of funds. And then if you don't tap it and then you pass away and this goes on to your kids, your kids are going to get their inheritance without a tax mortgage on it. Now, there's another piece that we're about running out of time, but we're just going to talk about long-term capital gains and qualified dividends. So long-term capital gains are taxed at a significantly lower rate than ordinary income tax rates. And when I talk about long-term capital gains, a lot of times this is the selling of a piece of property, you know, where you bought it at one price and now you're selling it at a price, and the gain you've got to pay tax on, but it's at a smaller amount. And there's a lot of people out there sitting on some asset not wanting to sell it because – and they kind of need the money.
Their kids don't want it, but they don't want to pay the taxes. And when we get done doing the math, if we plan a property, there's a way to get into the 0% capital gains tax rate. And I'll just kind of leave it at that and not try to explain that on the radio, but there's a bracket that you could be in that allows you to pay 0% capital gains. Now with the state, if you're in North Carolina, you're going to have to pay the state 5 some percent.
You can't really get out of that, but if you're in a low enough adjusted gross income and tax bracket, and when I talk about low, let's just say less than $100,000 for a couple and less than $50,000 for a single person, that you sell a property, even if it's in the hundreds of thousands of dollars, the gain, there's a way to pay 0%. Another could change. It's on the tax chart. It's in the video at cardinaladvisors.com. Of course, our show is brought to you by cardinalguide.com, where you can email Hans and ask for his book, The Complete Cardinal Guide to Planning for and Living in Retirement. And wow, there's all sorts of cool stuff coming for us. A new year's coming, and God has prepared all sorts of neat works, right? You've been prepared for good works, and you get to do them. And one of those is getting to be a good steward of what God's given you.
That's right, what God's given you. So we appreciate you working on that and listening to our show today. Thank you. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Schile 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.
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