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This is the Truth Network. Welcome to Finishing Well, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish 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. Welcome to Finishing Well, a certified financial planner, Hans Scheil. Today's show, how fun is tax brackets?
That doesn't necessarily sound fun, but it's going to be fun, I'm telling you. Tax rates in brackets for 2023, and really it gets down to tax bracket planning, which really is really cool when you see the opportunity that has in front of you. So we want to talk a minute about the idea of blessing, and I know that for me personally, I always was confused by that word. Like, what does it really mean?
The Jews use it constantly. It's called a Barakah in Hebrew, and what does that mean, to get a blessing? And what does that mean, to bless God? How do I bless God?
You know, he seems like the man who has everything. And so, I think there's a really cool thing that when you look deeply inside the word in Hebrew, you can see that a perfect example of a blessing is the idea of rain. You're getting something in addition to what you already have that will help you from the outside, so to speak. And so, when you think of rain, which is the original idea of blessing, you go, well, you know, if you have got a field and you want to plant a harvest, you know, you've got to plant your seed, because otherwise if God blesses it, all you end up with is a muddy field, you see?
And so, as we talk about this planning today, we're hoping to show you how to get some seeds out there so that when God brings this blessing, which in this case of low tax brackets, that you can begin to reap a harvest. But the other side of this equation that has always been confusing to me is how do you bless God? Well, you bless God by giving something, giving him something he doesn't already have. And so, you may wonder, what is it that God doesn't have? Well, what he doesn't have is he doesn't have necessarily your gratitude. He doesn't necessarily have your admiration. He doesn't necessarily have, you know, a conversation with you right now. In other words, when you actually bring him in and thank him for the food, or you give him something, you're giving him something in addition to what he already has, and he didn't have it before, so you really do bless him, even if you think about him, right?
Just him, and he knows, believe me, knows. And so, just when you have those pleasant thoughts, believe it or not, that's a blessing to God, because you're giving him something he doesn't already have. And so, without an idea, you know, we need to bless some people, Hans.
Amen. And I could tell you right now how God is blessing me. It's with the radio and with podcasts, and then YouTube. He's just sending blessings right in my front door, and I don't have to call people up anymore. I've done that my whole career, and I thank God every day for those three things—YouTube, podcasts, and radio—because he's just blessing me with people to help. Because he's just blessing me with people to help. So— That's wonderful. That is a blessing. It really, really is. Everyone listening, you know, is an opportunity, you know, to share a relationship with we didn't have. So we're grateful, and it is a blessing.
Well, it's just, it's something else. And so, the topic today is, we're talking about tax rates and tax planning for 2023. And these things come out, they came out about a month ago, and the IRS puts out the brackets and the rates.
The rates are already cooked, but the brackets aren't, and they put them out. And we, as tax planners, look at them, and we study them, and we look for trends, and we're thinking about the future for all of our clients. And specifically, we're talking about this today for people that are retired, and that who are no longer contributing to their IRA or their 401k, or they're just finishing their career, they're getting ready to retire, and they've got a balance built up in their IRA or their 401k that's there, and the taxes haven't been paid on it yet. And most of them are aware of that, but they really don't want to think about it. And, you know, when I start asking them, like, what's that money for?
What's it really for? And people have a hard time with that because it's just kind of there. And, you know, the answer to that question is, after I get done with them, is for you to enjoy and live off of during your retirement, to supplement your Social Security, and to be there for you. So, but a lot of folks have a real hard time with that because that's savings, that's money they put aside, that they've done without to have that.
And then now, all of a sudden, they come into this financial planner, and I'm starting to tell them, you need to pull money out of there. And you need to do it scientifically. Because if you take too much, all at once, you're going to push yourself into a really high tax bracket. So when I say scientifically, it just means that we need to be thoughtful about this before the year ends, and take a specific amount out where we can pay a low tax bracket. So people get confused by this.
So let me just give an example here, like we were talking about earlier. Let's say there's a married couple who is living on about $50,000 a year, okay? And they are not paying much tax, very little tax, federal and state. And then they've got a pretty sizable 401k that they're not, or IRA, or it used to be a 401k, it's just money they haven't paid taxes on yet that's growing usually, maybe this year it's not growing, it's gone backwards. But they really don't have any plans on touching that money until they reach age 52, and they have to take minimum distributions, because they think they're better off not paying the taxes and just leaving the money in there. And so if we went to this couple, let's just say they have $600,000 in their IRA, and they're thinking, well, why should we take anything out of there?
We don't really need it. We've got money through our Social Security and whatever money we're living just fine on the $50,000. Well, what they don't realize is their income could be as high as $89,450 as a married couple, and they would only pay 12% federal tax on that amount. So another way to look at this is they're leaving $39,000 on the table of 12% tax money by letting the year end, and they don't pull anything out of that IRA. Does that make sense to you? Yeah, absolutely. And that's why understanding the tax rates and what's going on in 2023 becomes critical to the equation, right?
Well, it does. And so we don't have to spend this money. We're just better off pulling it out and just paying the taxes, which would be 12% of this. Let's call it an extra $40,000. And then we pay 12% taxes on that extra $40,000, which would be about $5,000 or so. And you say, why should I pay $5,000 in taxes if I don't have to?
Well, $5,000 in taxes on $40,000 is a bargain, and then you've got to pay a little state taxes. And you can just put it in a savings account or invest it outside of the IRA. And when you later want to get at that money, you don't have to pay income taxes on distributions. Or even better yet, you could convert it into a Roth account, and then the after-tax amount, and then it's going to grow tax-free.
And it's available to you whenever you need it. But now you've got a bucket of money where you don't have to pay taxes when you pull money out. And once you start this game, I mean, when I'm looking at this tax chart that you can see on the YouTube video, or you can go to our website, cardinalguide.com, and you can see all these charts, the same couple that are both over 65, they've got a standard deduction of $30,300. That means they can take that much in tax deductions. So if they're on this $50,000 income that they're living just fine, by the time they get down to this tax chart, they're really going to be at $20,000. So they're leaving a lot more on the table than $39,000. So that's the kind of planning that we do for people is we sit here and we scientifically plan for them to start pulling money out of that IRA, a taxable IRA, and pull out just the right amount, and maybe not spend it. Maybe we could spend a little bit of it. But if we have the luxury of not spending it, then we're going to either put it in a savings account, or some type of investment, or better yet, we're going to move it into a Roth. And it's still in an IRA, but it's now in a tax-free IRA.
Darrell Bock Right. And one of the big misunderstandings that you guys went over in the video that I know we're going to cover in the next segment is understanding the tax brackets themselves and what happens when you go up one or down one, as the case may be. And man, I had a huge misunderstanding there.
So we got that coming. And this tax bracket thing, it doesn't just fit for your income, right? It has to do with capital gains and gift tax as well, right? All these things figure in.
David Morgan Well, sure, they all figure in. People are misunderstanding this. I mean, people that know things about taxes, and I just think of a lot of people where we're doing this planning, and that are in much higher brackets than I was just talking about, they think that if you violate and you get into the next bracket, like, for instance, the $190,000 is the top of the 22 percent bracket for a married couple in 2023. So they're thinking that if they got to $195,000, which is dipping into the 24 percent bracket, that means that just going over the line means they're going to pay 24 percent tax on all their income. And nothing could be further from the truth. Because if they go over the line, it's just the amount they went over the line that they paid 24 percent tax on.
So these are marginal tax brackets is what they are. Darrell Bock Right. And it's a clear understanding. And since some people, Tom talked about in the video, they wouldn't take a raise, or they wouldn't take that other income somewhere. It's like, here comes this blessing. But again, you don't have any seed in the field.
So you're just letting that become mud. Because there's the opportunity, right, for some source of income, and you're not taking it because you perceive that it's going to be taxed everything at this, you know, change your whole rate on everything that you're doing. It's just not the case. Tom I can't tell you how many times I hear that.
And I've heard it for years. Oh, no, you don't want that extra money, because that's just going to put you in a higher bracket, you're going to pay, you're going to end up with less. There is no situation in the US tax code where that's true. Okay, let me make that clear, is that more money, even though it does drive more taxes, it never leaves you, more money does not ever leave you with less net money.
I mean, it's just a fallacy. I hear that stuff when I'm around the relatives, and I just keep my mouth shut there. Darrell Bock That's a good time to do that at Christmas. Well, we gotta go to a break. But in the meantime, we want to remind you that the show is brought to you by Cardinal Guide, and where you can go to CardoGuide.com, and of course, see the Seven Worries tabs and the YouTube video on all these topics, including, you know, today's tax brackets for 2023. And we'll be right back. Oh, we should mention Hans' book, The Complete Cardinal Guide to Planning, Forward, Living, and Retirement.
We'll be right back with much more on 2023 tax brackets. 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, certified financial planner, Hans Scheil. And today's show is 2023.
Boy, it's a pound as quickly. Tax rates and brackets. So, Hans, when we left our heroes, you know, we were talking about married couples, but single filers, you know, it's just as important, right?
Well, yeah. I mean, where we talked about the top of the 12% bracket for a married couple in 2023 is going to be 89,000. The top of the 12% bracket for a single filer is 44,725. So you look at that and, you know, if you have this single person making $50,000 or living off of $50,000, now they're filling up the 12% bracket and some of their money is in the 22% bracket until they take their standard deduction, which is they're over 65, there's going to be 15,700 in 2023. So now they're down to $35,000, okay, is that standard deduction.
It works very well for seniors and it just pushes people into lower bracket. But understand for a single person, these numbers add up real quick. I mean, the top of the 22% bracket is 95,000 and the top of the 24% bracket is 182,000. Yeah, I have several people that I'm working with that perhaps they live on $80,000 to $100,000 to $110,000 a year, but yet they're married couples and they, once they understand this Roth thing, they're bringing their income up to $364,000 because they're filling up the 24% bracket because they've decided it's better to pay the taxes now than have a huge tax bill in their 70s and 80s.
And then what I always point out to them is this is a limited window as long as both of them are alive because when they become, one of them is going to die before the other, and then that's going to force that survivor into the single filer bracket. And so for these high income people, when they start taking a look at that, it's going to make them all the more wanting to take advantage of the married filing joint. Yeah, that's not to mention the fact that right in 2026 tax rates go up big time, right?
They do. And that's without changing the law. That's what people need to understand is that when they did the tax cuts back in 2017, they started in 2018, they were an eight year thing. So for the budgeting, they have to have a sunset. They have to have a, you know, we're going to budget this in the federal budget for like eight years or nine, how many years are worth. And then in 2026, unless they change the law between now and that, between now and that, these things go up significantly. And so there's another factor considering here is that people study these brackets, you know, with us and they're making a distribution plan of their IRA. They, you know, we've got 2023, 2024 and 2025. So we got three years and this may still be a good deal in 2026 and beyond, but it's going to be more. So let's, let's, let's, let's take advantage.
I mean, if you don't take advantage of the blessing by doing the thing, the blessing goes to waste. Yeah. That's the deal. We don't want to do that.
There's no, there's no doubt. And being able to pay 12%, 22% or 24% tax federal. Now, whatever state you're in, you got to add a little more.
But those rates at the federal level, I don't know if we're ever going to see those. So I, I just think it would be wise for anyone to take a look at these brackets, take a look at what your income is after the standard deduction, and then consider if you have money in an IRA, considering making some distribution next year, whether you just distributed pay the tax and save the money or spend part of it, or you'll roll this into a Roth. And you, you now have a tax free account that you can draw on later. You can give your kids that's tax free to proceed to them. Right. That brings up a great point.
We really hadn't talked about, but I know there were some folks out there, maybe not heard us before talk about it, but if you're thinking, well, it doesn't matter. I'm going to give the money to my kids anyway. Well, Oh my goodness. If you can get the taxes paid ahead of time for them at 12% or whatever. I mean, this is a huge opportunity to not leave your kids with a huge tax burden, right? Well, yeah, because the only way the kids can get the money that's in a regular IRA is just to pull it all out right away or pull a lot of it out right away.
And you know, that's a bigger problem than people spreading it out. It's just because if you think about it, because this money in an IRA comes, this pays by beneficiary. And so this is the first money that shows up after somebody dies. I mean, they just, you know, one month, two months after the death, the custodian, now they've been informed and they get in touch with beneficiary and they say, well, what do you want to do with this? And you know, the kids say, make me out of checks. And you know, boy, you don't want to do that. You don't want your kids doing that because they're going to end up in a huge tax bracket.
If they take the money all at once, if it's in a traditional IRA, if you've got some of this coming to them in a Roth, then it comes to them tax-free there. Yeah, that's a big part of the planning. And then the other planning is Irma, right?
Well, yeah. So a lot of people find out about Irma, which is the Medicare tax. They find out about it right when they go on Medicare. And you know, they find out if they're over the threshold. And the threshold for 2023 for a couple is like 197 grand.
And for a single filer, it's about 95 grand. And there's a few other variables in that. But if you're way under those two numbers, then you don't have to worry about Irma. But when people start pulling money out of IRAs and increasing their tax bracket, sometimes they can jump into Irma. And so we always inform them of that. But it's a consideration.
And for some people, it's a stop sign. Boy, that Irma bill comes in. I don't want to pay that. Well, sometimes we got to talk them over the ledge.
We got to sit down and we got to say, okay, that's a factor. You're having to pay some Medicare tax. But that's one time. It's just for one year you're paying that Medicare tax.
The benefits of this tax-free raw are going to go on for your whole lifetime and then beyond your lifetime when it goes to your kids. So we got to balance these things against each other. But it certainly is a factor. And it's another reason, as I was thinking about it, that you want to do it before one of the two of you dies. Because right now, if you're going to get a huge deal with Irma being at 90, if you're the surviving spouse, it's going to be really hard to get the money out of the IRA without paying Irma after something like that happens.
Well, that's the problem. I mean, we have several people where we're going to have the survivor and they have a big IRA that they just took the minimum all these years. And then finally it gets along that the minimum, when you get up there in years, gets pretty large and it's enough to drive people into Irma. And boy, that's a surprise.
You want to talk about some of these older folks when they all of a sudden get hit with Irma and they got these minimum distributions. That's not the kind of stuff you want to be dealing with. It's just the shock of that when you're 85, 90 years old. And a widow, right? I mean, you don't want to leave your wife with that. It's like, man, what do I do with this?
You know, I just can't imagine Tammy in that situation. So yeah, it's something to look at. Well, and that's the beauty of planning, right? Well, it is. Let's talk about one other thing on this video is that the annual gift tax exclusion is $17,000.
So it's gone to that. And I can't tell you how many people tell you, oh, no, you can't give anybody more than $17,000 without paying taxes on it. And that's actually not true, okay? I mean, if you wanted to, for whatever reason, give your kids money to buy a house and it wanted to be more than $17,000, I can show you how to do that and not pay any taxes. Let me just put it to that way without getting, but the number has gone to $17,000. But understand that people that have a lot of money and they want to give it away to their kids and grandkids, if there's a husband and a wife, you can each give $17,000 to any one person.
So that immediately takes the 17 to 34. And then if your kids are married, so that husband so that husband and wife, now you can each give 17,000 to both of them. So now it's $68,000 for one family.
So if you've got a large chunk of money that you want to give away while you're alive, and you want to give it to your children, while your grandchildren or you want to give it to really anybody, the limit per person is 17,000. We can work with that with a gifting strategy and give away a lot more than that. That's beautiful. Absolutely. So yeah, all these changes for 2023, they look helpful.
Well, they are. I mean, it's just to know this stuff in advance of when you do things is just smart. It means you can give more. I mean, my largest giving client said to me, that's where he finished when I was explaining QCDs and I was explaining all this kind of raw stuff. This guy gives away a lot of money to the church. And what he said to me was, well, that just means you can give more.
And I thought what a great way to look at it. I mean, the QCD, the qualified charitable distribution, once you're 70 and a half, you can give a large part of your IRA away every year to the charity. It counts as a minimum distribution, and you don't have to pay taxes.
And that's really important. Don't import all of your money in your IRA. You want to keep some for when you get older, you can give it away if you give a lot and you're a tither to the church. And that's something you need to do right at the beginning of the year. It's got to be your first distribution. So it's one of those things you don't try at home is a QCD, but all the more reason that you need to get up with Hans and Tom at cardinalguide.com. Again, it's at cardinalguide.com where they've got the seven worries tab, where today we've talked about taxes.
Of course, it goes to so many different things. In those show notes, you're going to find all those tax brackets there at the taxes worry tab, as well as ways to, of course, get up with Hans, as you can see that this is just an opportunity for you to do some real planning, which they have people there that want to help you do that at cardinalguide.com, as well as get Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And we're heading into 2023 quick.
So, you know, it's a good time to get up with him. Thanks, Han. Great show.
Thanks and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.
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