Retiree Income Tax

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Enjoy it, share it, but most of all, thank you for listening and for choosing the Truth Podcast Network. 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 with certified financial planner Hans Shile and very fun today.

You may not sign fun at the outcome, but it's gonna be, I assure you, it's retiree income tax. And so as we enter into this, I thought it was really cool that we think about just the idea of knowledge in general, right? And there's this proverb, it's actually in Proverbs 18 verse 15, it says, the heart of the prudent getteth knowledge and the ear of the wise seeketh knowledge. And so it's kind of cool that it's coming with wisdom and these different anointings that Christ got because Christ means anointed one. So the anointings that he got in Isaiah 11 are the anointings of wisdom and understanding and counsel and might and knowledge and fear of the Lord and delight in the fear of the Lord. So these come in really, really handy when we're headed into retirement or trying to be good stewards of what the Lord has given us. And I think today's show you're gonna find extremely helpful when it comes to a standpoint of knowledge. But I wanted to break down the word knowledge for you in Hebrew.

I don't know if you've ever looked at it. It would be pronounced dot and the letters are pictures in Hebrew. And I thought I would paint this picture for you because I think it'd give you a new insight into the word knowledge from a biblical standpoint. So when we look at those letters, the first letter is a dalit and that dalit normally means humility.

Like the first verse in the dalit section of 119 Psalms says, My soul cleaves to the dust, quicken me according to thy word. In other words, this is this idea of total humility. And when you think about that from a standpoint of knowledge is if you think you know the stuff, you know, you're not gonna gain any knowledge. In other words, from the point of humility, like I need and this idea of cleaving has a lot to do with that dalit. So I'm cleaving to try to understand something I don't understand.

But you first gotta admit you don't know. And then the second and third letters I'm gonna say at the same time, because they're so cool. Second letter is an in which has to do with your eyes and seeing, especially with your heart. And the last letter is a tav which means the truth. So here's this idea of this soul that's cleaving to the dust and humility trying desperately to learn through their eyes.

They wanna see the truth, okay? And with that truth, again, is applied with wisdom from the first anointing. Then we can now be good stewards of what God has given us. So as we head into this idea of retiree income tax, Hans, take it from there. What we're talking about today is just the income tax system and how it applies to retirees as opposed to during your working years. And so, you know, many people when I put up sessions on this and I talk about retiree income tax, I put up videos, you know, they'll comment, well, the taxes are the same, the rates are the same and that's true. But in working with retirees, taxes play out very differently in retirement than they did during your working years.

What I'm gonna do is just jump right in is the most important money coming in to most retirees is their social security check, even very well-to-do people. They get real interested in this in their 70s and 80s because it's really, for most of them, the only regular check they've got coming in. And, you know, if they have assets, which many of them do, and, you know, those assets is you can certainly draw out of the assets to make distributions in addition to your social security check.

And that's how most people live. But the social security check is really the main check and most couples in retirement, they got two of them. So I think the first thing we want to talk about is federal income tax on social security. And if social security is all you have, and that's your only income, maybe other than something small other than that, you're not gonna pay me tax. There are very little taxes on your social security check. So that's the way they built the tax system that people are forced to live through their own, you know, they lack of savings, or maybe something bad happened to them.

For whatever reason, people have this is their only check coming in, or they're only two checks. And they need to live off of that. They're not going to pay any federal income tax. Okay.

Right. And so the calculation for taxes for federal taxes on your social security check is going to be determined by your income or your taxable income, other than social security. So what we do in our planning a lot is we try to just depending upon how much income people are drawing down people that have a large amount of savings, and they have needed to do a large and they want to do a large amount of spending, and then the social security check kind of gets dwarfed in their picture. And it's really for those people that are drawing down out of their retirement savings, pretty substantially for those people, I mean, basically 85% of their social security check is going to be taxable, you know, at at the highest rates. But that also means that 15% of it even for people of high income is still tax free.

Now, then there's all the people in between. So it's going to be some percentage of your social security check is taxable, and then the rest of it is tax free. So I just wanted to make that point that when you have social security, and then you have other taxable income, which is most people, it's the other taxable income, and the amount of it that's plugged into this formula to determine whether you pay taxes or how much taxes you pay on your social security check.

Okay? Right. So for those of us who plan on working off, as you say, to die in the saddle and continue to work, as long as we possibly can, then our social security comes in. The good news is, as that money begins to come in, when you take it, you do get 15% of it with no tax, right? Correct. But that other 85% is going to go into your total income to establish what your taxable income is.

Correct. In your tax bracket. So, you know, so if somebody continues, like in your case, if you delay till 70, you wait till 70, and then you're still working, and you start drawing your check, what I like to recommend in that case is, you know, we'll determine the tax on the social security and you know how much it is. And then, because 15% will be tax free, 85% of it will count, maybe another, you know, 20-25% of the total will be gone to federal taxes. And so when it gets right down to it, you're probably going to net about 60% of it. And that 60%, you could just begin saving it further, putting it in a, you know, in a savings, you could put it in a raw IRA, if you have enough other income, so that, you know, as you go into, into your 70s, and then at some point, you're kind of forced to retire, then you're going to have not only that large social security check from the delay, but you'll also have all this built up tax free savings. Right, right.

That you can draw on. So, that's kind of the federal income tax applies to social security, but on nobody is 100% of it. And on people that are forced to live on it, their taxes are going to go way down, live on it exclusively or close to exclusively. Now, then we get to state income taxes. So, like in North Carolina, which a lot of our listeners are there, North Carolina, there is a state income tax. But they don't tax social security. There's no no tax on your social security, no state income tax, doesn't matter how much money you have. So, you know, that's five and a half percent that is on your regular income, but it's not on social security. So, what you're saying is when I start getting my social security, even though I'm working in my incomes, although the federal is taxing it, my social security income, not my work income, but my social security income is going to be absolutely, because I'm in North Carolina, tax free.

Yeah, I like that. And we got 12 states that tax social security for their state income tax. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, West Virginia. So, those 12 states, they're going to include either all or some portion.

They all do it differently. But that social security income, like in your situation, you also owe state income tax on that, whether you're retired or not. So, you know, people have a tendency to kind of avoid those states, or that comes from a surprise. I mean, if you've lived there all your life, it's not like you're going to run out of there because the tax on social security. That's 12 states. People need to take that into consideration. And we certainly do when we do planning.

We do planning for people all over the country, you know, our radio broadcast and podcast and YouTube, and we're getting calls from everywhere. Okay, so then the next thing we're going to talk about is when you're 65 plus, you get an increased standard deduction. And the standard deduction for all married couples is $25,100.

Now, let me let me repeat that $25,100. So, I take standard deduction now, I used to look at the standard deduction, and that was only for people with really low incomes, because I would be way more than that. And I still have some pretty substantial house payments and taxes and the kind of charitable contributions and all that kind of stuff. But I still take the standard deduction of the $25,100. And as to many people, and then when you're 65 and over both spouses, you get an additional 2800 bucks. So, you know, that 2800 bucks makes it raises it to almost 28,000 that is federal tax free. And in most states that have an income tax, like ours does, they give you the same, they mirror the federal stuff.

It's like 28,000 is where you get to deduct off your tax return, whether you have any deductions or not. Right off the top. Well, we got to kind of jump in here, because we got to go to a break. We're going to remind you that, of course, this show is brought to you by cardinalguide.com. That's where you find all the stuff for Hans, his email address, his phone number, all those things so you can get up with him, as well as his book, The Complete Cardinal Guide to Planning for and Living Retirement. Again, we want to remind you that his YouTube channel is cardinaladvisors at YouTube, so just look for cardinaladvisors. And there you're going to see a whole board with all this information about taxes, wonderful videos. And when we come back, we'll get more into retiree income tax for 2022.

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 room. 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 with certified financial planner, Hans Scheil. Today's show is retiree income tax, specifically now in 2022. So Hans, when we left our heroes, it seems like we were getting like 28 grand in the standard deduction that we can take right off the top. Yeah, that means that like we were talking about Social Security and you plug everything in and, you know, if you have significant other income, your Social Security to some extent or to a large extent is going to count in your taxable income. But before we go down to the tax table or the tax bracket is you're going to get like 28,000, almost 28,000 deductions, a standard deduction.

And this has also made it real convenient for people that are retirees, because you don't have to keep track of all that stuff. I mean, you just put down the number. I still can't get that into my prize that she's just chasing down receipts. And I just gotten to the point where I chase it down with it. I just, you know, and I throw them in a drawer or something never to look at them again.

Because there's just no way we're going to get that. And, and then let's go over what a single person is a single person is 12,550 for a single filing individually for people of any age. And then what's added to that is for people 65 plus is 1,750. So you're over 14 grand of standard deduction. And again, a lot of people are not going to reach 14 grand in deductions, you know, in retirement. If they have a, you know, they have a social security check, and then they've got some other income, and they look pretty well.

If they don't have a house payment anymore, and you know, their property taxes are, you know, not in that level. So I mean, this doesn't, the standard deduction doesn't mean much for very high income people. But to the middle income people, even upper middle income people, and the lower, this just simplifies the whole tax deal. And it's, you know, it's enhanced in retirement.

So it's wonderful. Yeah, and then the next thing that I put down is you're going to have to pay this Medicare tax, which is called Irma, you know, and we've made some jokes on some other shows that the character Aunt Irma is over there with Uncle Sam, you know, collecting a tax on your Medicare. And the thresholds for that are for a married couple $182,000 a year of income.

And there's a little bit of a complicated formula, but we're just talking generalities here. So if you have a combined taxable income of less than $182,000, you don't have to worry about paying this Medicare tax. But if you, you know, have an income of three or $400,000 a year, as a couple then you're going to face a pretty significant Irma. And some people are bumped up there through Roth conversions after they come in to see us. They get pumped up over this threshold because they're voluntarily paying taxes now on some IRNA or 401k money, doing a conversion so that it can be tax free later. And so this is a consideration.

And then there's people that are just well to do, or they're still working in retirement. This is a big deal. Now, for a single person, the Irma or the Medicare tax comes in above $91,000. Yeah, well, there's a couple things that I think are fascinating about Irma. Number one is, it's a ledge thing, right? Like, man, if you go over that $182,000, it's like, wham, you get hit with a whole whopper. But if you're at $180,000, nothing, right? And so it is, from a standpoint of some planning done, like, wow, if I am doing a Roth conversion or whatever, I know exactly where that ledge is, and stay away from it. Because if, like you say, and so unlike, you know, other tax rates and whatever, that ledge takes into the Irma thing.

And I find that fascinating, that that's there. But the other thing that, you know, I find a lot of retirees I talked to, really have no understanding at all that they're paying some part of their Medicare, you know, Medicare Part B, there's fees involved in that, that they have no idea. Well, yeah, because they take them out of their Social Security check.

Right. And I've run into people with Irma that didn't read the letter that they're taking, you know, they're taking Irma out of their Social Security. I mean, we can appeal Irma and all kinds of stuff. We can also plan around it. We're planning for the long term. So sometimes people are early in retirement, and they're just coming to us, or the right before retirement, well, maybe we're going to go ahead and do some tax things and take on significant Irma for a year or two or three, so that we can plan to be in the 70s and not paying her and not paying a bunch of other taxes too. So there's a, there's a, an element of incurring some pain now to avoid significant pain later. So in our plan, so I remember that from my friend Fran oil filter days, you know, as a car mechanic, you know, you can pay me now or you can pay me later. That's the deal, right?

Yeah, there's a lot of stuff in that. And then we, you know, we're sitting there talking people into paying more taxes than they would if they hadn't come to us. And it's like people are saying, I, I came to you to lower my taxes, not to raise them. Well, that's the plan over 2030 years.

So, right. And while we're speaking to that, I mean, what I was just going to show everybody and I did on the video is the top for a single person, the top of the 22% tax rate is 89,000 of income, you know, and up hit other means means your last dollars, you're going to be paying 22% federal. And if you go $1 over that, then all those dollars beyond that are going to be 24%. And for married people, that's 178,150.

And so why is that? Well, if we're actually planning to pay taxes through doing Roth IRA conversion, you know, these are the numbers we plan right up to. And so on that federal income tax, it's a it's a sometimes we have people that go even much higher than that, in terms of a conversion from a Roth, because they're willing to pay the 24% federal, and they're willing to do. And then that's going to create Irma is going to create social security income taxes.

But we're just going to do that for a few years. And then we're going to build up a Roth balance that we can later take out a tax free income. And then we're going to be way down in taxes, I like the 0% tax bracket.

So I have other videos, other shows on that, but I want to talk about the income tax brackets, which are and the amounts and the percentages are pretty low, compared to history. And then the state income tax. So I want to go back to the states again, there's, there's eight states that have no state income tax, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. So they don't have any state income tax at all. And you have people who move to these states and retire into these states just take advantage of that. And the tax rates for state income tax, the lowest is North Dakota, 2.9% of the states that have it in California, in the highest bracket is 13.3%. I mean, that has something to do with a lot of the exodus from California. But the cool thing you pointed out in your video was that California has no income tax after you're 65.

Right on your on your social security, on your security, right, right. And so we have a lot of people in states like that, that are doing Roth conversions, and they're setting up so they have a social security. And then they have other income coming from tax resources. And so they can just avoid both of these taxes in retirement. I mean, depending on how much money they have, and how much they want to spend. But there's, there's a lot of ways to shelter things. And frankly, when you go to Las Vegas, which I go to for meetings, there's a lot of California residents that have significant money that live over in Nevada, because there's no state income tax that they spend half the year and in just under half the year in California. Yeah, I know a lot of folks are like that with Florida in our area, that they they live in Florida a little over six months. So they don't pay, right?

Any sales tax on there? And so this isn't a real exciting stuff. I mean, I didn't expect it to be but in our planning is we work to understand all of these things. And then we sit down with people that are coming to us for planning, and retirement planning, financial planning, tax planning, and we listen to what they want, and listen to what's important and how much money they need to live on in retirement. And then we figure out ways to plan all this, so that they reduce their tax bill over their whole of their retirement.

Of course, it doesn't sound like all that much to sink your teeth into. But as you begin to understand, wow, it almost is fun to me now at this point in time, Hans, to see ideas in order to maximize the tax free income from my you know, from my estate, in other words, my kids, right? As I do those Roth conversions. So if we talk about the other side of the equation, the neat, neat, neat thing is, right, that they're that in my estate, if I'm doing my planning, right, that we're going to leave money that is absolutely tax free to, you know, the next generation that is going to really need the money, right? Oh, absolutely. And you know, we've got long term care solutions that are tax smart, to plan to make income taxes later in your life lower than specifically if you need care to be buying it with after tax money or money you don't pay taxes on, which is protecting the estate. And then if you don't use long term care, that comes to your kids tax free.

So the taxes and tax strategies are buried in everything we do. Yeah, that's absolutely wonderful. As usual, we've run out of time before we ran out of show. That's good.

That means we keep doing more shows alpha. So well, we want to remind you that today's show is always brought to you by Cardinal guide.com. Cardinal guide is where you're going to find Cardinal advisors, which is what his YouTube channel is. But at Cardinal, you can get Hans his email address his book, the complete Cardinal guide to planning for retirement, as well as the phone number to contact him to help you.

I mean, what a what a joy it is really to work with somebody that really is having fun doing this from my standpoint, and and being good stewards so that so that we really can finish well. Thank you on so much. Thank you and God bless you. God bless finishing well as a general discussion and education of the issues facing retirees. Cardinal guide.com Cardinal advisors and Hans Shiel CFP sell insurance. This show does not offer investment products or investment advice. We hope you enjoyed finishing well brought to you by Cardinal guide.com. Visit cardinal guide.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 cardinal guide.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 cardinal guide.com cardinal guide.com. This is the truth network.