Hidden Taxes For High Income Retirees

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Thank you. Welcome to Finishing Well, a certified financial planner and home child. Today's show is actually hidden taxes or high-income retirees. And before you eliminate yourself from that high-income retiree. A couple things I would bring to your attention is that if you live in America, you essentially are high-income, okay, compared to the rest of the world. And we're going to get into that in a second. But also, when it comes to these taxes, you might be surprised how easy it is to be considered high-income.

So we're going to get into that, but I don't know if you've really thought about it, but there's this Bible verse you may be familiar with that says, To whom much is given, much is required. And so it's kind of neat. I remember the story well that I had this dealership that I worked for that was really doing poorly. And the owner one time came in here just scratching his head. He goes, Oh, for the days where I used to have to pay a lot of income taxes. And apparently it was no longer the high-income person that he once was, and he was really grateful to be able to pay those taxes.

So it's something to think about if you've got taxes to pay. But the thing that I really want to make note of here is that where much is given, if you know the gospel, if you know Jesus, if you have a relationship with Jesus, oh my goodness, you've gotten so much more than wealth. And so it's very much required of us, right?

As you meet somebody, you see the dark in their eyes. It's definitely, to whom much was given, it's our job to share the light, man. Share what it is that God has given you.

Of course they can reject it, but that's on them. For us, it's just a matter of making sure that we show the grace, we show the love, we give everybody an opportunity to have what we've been given, and which is really a fun thing when you see somebody's eyes light up and they get it. Like, man, I'll never forget some of those moments. And so if you have what I'm thinking you got, if you're listening to this program on The Truth Network, wow, you've been given much.

And much is required, Hans. Yeah, I think that the way to do that, to show people the light, is just living it, man. And I've certainly been given a lot and have a lot to be positive about and happy about and thankful to God about. And one of those is my job.

I get to just go around and solve problems for people all the time. And so today's topic, we called it hidden taxes because for the most part, these taxes are hidden. I mean, just like they're saying is that we start with the Medicare tax called IRMA, I-R-M-A-A, Income Related Medicare or Monthly Adjustment Amount, I-R-M-A-A.

I mean, how's that for hiding them? And I'm not sure the government really had a plan to hide them, but they also don't run any ads on TV saying, look how much money we suck out of the people that have a lot of income to pay for Medicare or pay for their own Medicare. For the most part, it's hidden and I'm going to shine the light on it today a bit and really talk about what it is and how we can make it at least a little better for you and just knowing about it is helpful. And the next one is the Social Security tax and I think that's what Robbie was referring to. We're always careful on this show that we don't tailor it to only rich people because most of our listeners are not what they would call rich. Some are and some people were talking about rich and money and I'm kind of mumbling and rambling about things, but so when you get to the Social Security tax or the tax on Social Security, you don't necessarily need to be rich to be paying some taxes on your Social Security. And I was pointing that out to Robbie and that's a hidden tax because if I ask most people on the way in to explain it to me, I mean they know that they're going to have to pay some tax on their Social Security, but actually to explain to me like how that happens or where they get it from. I mean it's another hidden tax and you certainly don't have to have a very high income to be affected by it and then the investment income tax, which is if you have substantial investment income and just generally other income, you're going to pay some extra money on your investment. And there's plenty of people affected by that, like when they sell a piece of property or a business or something that's kind of a one-time thing and they're paying capital gains on it. All of that counts toward in that year, you're going to pay a bunch of taxes for having what some would consider a windfall. So really the purpose of this show today is I'm not going to try to teach you about the workings of all three of those taxes, but I so much want to just point out that they're there and to go over this subject called MAGI or Modified Adjusted Gross Income.

And we can kind of have a laugh a little bit because people like say, now I got to worry about all this stuff and income taxes and adjusted gross income, AGI and income taxes. And now we got a special thing for the seniors, it's called MAGI or MAGI. Yeah, and if I'm not mistaken, there were three of those that came over to see Jesus. That's exactly, yeah, they're pretty wise dudes from what I understand. And they got the same name as the formula for part of the hidden tax of the higher income retirees in America from the IRS. So the MAGI and those people share the same name. I don't think they share much else other than the name.

They're following a star in their own way. Okay, so if you're seated or whatever, if you're driving, please don't stop and do this, but just if you wrote down MAGI on a piece of paper, modified adjusted gross income. And if you start from the left and you work to the right, you're going to be really confused by the time you get to the I. So the real way to understand a tax formula or a tax acronym is to start from the right and work to the left.

It's Hebrew, in other words. There you go. Okay, so modified adjusted gross income. We're going to start with income. And I think that most people, when it comes to taxes, know what income is.

If I asked you what was your income in 2022, most of you could probably generally tell me your salary, how much you made from investments, anything else that you took on. It's money you're going to pay tax on. Then you go to gross income. The next letter from right to left is gross, so gross income.

And I think most people, if we sit down and we're talking in light of taxes, they know what we're talking about. Gross income is all that money that you took in last year from your salary, from Social Security. Well, in this case, it's not going to include Social Security yet, but your gross income is going to be money that you took in last year that you're going to have to pay taxes on. And the word gross means you haven't done any deductions yet.

So now we go to the left. One more is adjusted. And so when I say adjusted gross income, if you've ever done your own taxes or if you've ever had a discussion or read about taxes, a lot of people know what AGI is, adjusted gross income. And that's income that was gross income, meaning you hadn't taken any deductions. And then adjusted, what does the adjusted mean? Now we took the deductions.

No, it actually isn't. Oh, sorry, confused. No, all this modified adjusted gross income or adjusted gross income, deductions come way after that.

Okay. So what we're doing is we're coming up with a number that we're going to use to levy all these hidden taxes. So first there's income, then we've got to make sure it's gross income, and now we've got to adjust it.

So just to do the math for a minute, if I'm following you, I just want to make sure the listeners can. So if I've got my income and now I take the taxes out of it? No. No? I don't?

No. For most of these people there's an adjustment, there's an added on. Because adjusted gross income, the adjustment part can be either an add-on or a deduction. Right. And again, I say to most people, like you're familiar with AGI, and a lot of people say, oh, yeah, they start nodding their head, they say AGI.

And then I say, tell me what it is. Right. Well, I assumed that it was, you know, when you look at that, it's on the tax form, right? Before they start to figure.

Before they take your deductions. It's up near the top. It's about line two. Okay. And let's just put it this way, there's some adjustments they make on everybody. Okay. It could be for alimony where you either deduct it or add it.

You know, it could be for some kind of foreign income. They're adjustments, but they're not the deduction adjustments for the tax adjustments, right? Correct. Okay. They're just adjustments.

And there's a whole list of them if you want to dig into this thing deep. But if you tell me you're familiar with AGI on the tax return. Right, I am. And remember, we're going to get to one more word to the left, which is the modified. And that's what I'm going to tell you today is it's really what they do for the seniors, it's so good of them, is they modify your adjusted gross income or your AGI. So whatever that line two is, or line whatever it is now on the tax form, which is AGI, now they're going to add a modified.

Okay. And why do they modify? Well, they modify it because they want to add to it.

They want to have a larger number. And they want to prevent people from using a common tax shelter. Because if we go way back to when they started taxing Social Security, Social Security is taxed by your other income.

Okay. So in other words, if you got no other income, you're not going to pay tax on your Social Security. In fact, if you have little other income, you're not going to pay tax on your Social Security.

You need to have substantial other income. And that other income is going to cause the tax on the Social Security. This was passed in Reagan's second term, like 40 years ago.

Okay. And a lot of people still don't know what it is. But people like me do, you know, when I study this stuff, I'm a Social Security nerd, and a tax nerd. So I've been around for about 40 years, and they're saying, you know, if people say, well, if you're going to start taxing my other income, and I'm a senior, you're going to start taxing my Social Security, I'm just going to put all my money in tax-free bonds. I mean, I'm just going to take whatever money I got, put it in tax-free bonds, and that way, I won't show it as income, and my AGI will be lower, and I won't pay taxes on my Social Security either.

That's what all the people like me were doing, is saying, oh, put it in tax-free bonds, and you're going to shelter it from taxes. So I knew we need to go to a break here. Oh, yeah. Wow. Yes. I was so interested. I've lost my place.

Okay. Well, we want to let you know that you find out more information, which I'm sure are like me and you want to, you just go to cardinalguide.com. That's cardinalguide.com, and there you can click on a link to find out and talk to Hans personally, or the one on taxes, which is today's show under the seven worries, and we'll be right back with so much more finishing well. Welcome back to Finishing Well, a certified financial planner, Hans Scheil. Today's show, hidden taxes for high-income retirees, and oh, I found out I was a high-income retiree, but we're going to get to that. We're going to find out about the Magi, all this stuff.

Now we're back, Hans. Yeah. Well, the government uses AGI, or adjusted gross income, for a lot of criteria. When you hear them talking about taxing the rich, they use that number of 400,000 and above, and we're going to put these taxes on them. So AGI is kind of the number that's quoted in a lot of press things, a lot of press releases, when the government's speaking. It's a pretty commonly used number of people that understand taxes. And so the real point of this Magi is there's another letter there.

There's a modifier, modified, and then you add AGI. And what the modification for seniors mostly is, tax-free bonds, municipal bonds. And people are going to invest in tax-free bonds anyhow, well-to-do people, because it's, you know, would you rather have 4% and pay taxes, or would you like 3% and they're tax-free?

Okay? I mean, we could get into the math of that, is if you had the 4%, by the time you get done paying the taxes, you've only got 2.5 or something, whereas you're better off with the 3. And those examples are a little bit dated, because now you're getting, you know, 5% on money with the current interest rates, and then the tax-free bond market is having to pay out more, so maybe that number would be 3.5 or 4. And regardless, you're going to get less on tax-free bonds, but they're going to be at least federal tax-free, and they're going to be state tax-free if you buy them and they're based in your state, or if you're in a state like Texas or Florida where you've got no state income tax. So, they're not entirely tax-free to begin with, but most of the time we're talking about federally tax-free, and so people are going to invest in those that have money, just so they don't have to pay taxes on their interest earnings. Got it.

Okay? And so, when they first passed the social security tax, or, you know, I went through that in the first part of the show, it's based on other income, and so when that came out, people started shifting money that they had in CDs and investments into tax-free bonds, and they sheltered that income from their adjusted gross income number, and then that made them pay less taxes on their social security. That's when they invented the M, or the modified. They said, oh no, we're going to add in any tax-free bond income back into your formula to make you pay taxes for social security. And you can have as much as if you're a single 30,000 of other income, besides your social security, or 50,000 for a couple. I'm oversimplifying this, but I'm just saying that it doesn't take a lot for you to be considered a higher income person when it comes to tax and social security. Where this really plays out is with this Irma business, which is the Medicare tax on high income people, is a lot of folks that are in a high income, getting ready for retirement, have accumulated some tax-free bonds.

They've gone into those. They've got money coming in that they haven't been paying taxes on. Rightly so, that's part of the deal. They get a little bit less interest, and if they're smart about buying them, there's a whole sector of people doing that, and this is going to come get you not only once you start taking your social security check, but when you're on Medicare. And so, because they count as income in the calculation of the Medicare tax, because you do put them on your tax return, and your federal tax return, they're just tax-free. And so, the Irma is not something you fill out a tax return for, the Medicare tax. It's something the Social Security Administration, as a courtesy, does it for you. Because they already got your tax return, and they used two years ago tax return.

So, that's what's really frustrating about this hidden tax. If somebody's going on Medicare, they're turning 65 in 2023, they're like me, born in 1958, they're maybe even still working or not, or whatever, they're going on Medicare. So, they're going to get their Irma letter about a month after they get their Medicare, and it's going to say we used 2021's income tax return.

We looked it up, we added back in your tax-free bonds, if you had any, and you have this much modified adjusted gross income, and because of that, we're going to start charging you this amount for your Medicare Part B and your Medicare Part D. And it's a lot, and it bothers people. And what can you do about two years ago? I mean, how would I, as you come into me in 2023, and I'm helping you with Medicare, and we're doing a bunch of financial planning, how are we going to do anything about 2021? I mean, there's nothing we can do about it.

It's already booked. Now, what we can do is we can file an appeal to the Irma, because if you just retired, or you're going to retire this year, then we can go to the government and we can say, okay, that wasn't a good picture in 2021. This is the picture now, because he just retired, or she just retired. So there's ways to get around some of these taxes. There are also, we can adjust your finances now, at least, so we're going to be in a better position a couple of years from now. All that being said, we can't let the Irma tail wave the tax dog. I mean, if we do too much planning around Irma, and some people tend to do that, because this angers them enough that they start getting me all fired up to rearrange their money to avoid a tax, which is substantial, but it's still not substantial enough to redo a whole investment plan. So what I want you to walk away with is they've got a little different formula for those three hidden taxes, the Irma, the Social Security tax on that, and for the investment income tax, which starts at 250,000 of investment income for a married couple and 200,000 for a single person. So it's got a pretty substantial threshold, but like I said, it could be from the sale of a business. I've seen a lot of very average people get into investment income tax in an extra income tax just on the capital gains rate on the sale of a business when they exceed those thresholds, or some big piece of property, something like that. So the whole purpose of the show is to define MAGI, M-A-G-I, and then to talk about the hidden taxes, and then talk about the sense of how we can plan your money, plan your taxes, plan your income, plan your investments in such a way that we can make these the best they can be.

Yeah, and the other thing that happens that I've seen and we've talked about in previous shows is that you're married and things look just wonderful, or otherwise, and all this stuff, but now one spouse passes away and the tax structures change, and what used to be hidden is no longer, I mean, or it used to be not appropriate. Now, not only you've got one less Social Security check, but now, oh, what in the heck? I'm telling you that people at about $150,000 a year income between the two of them, they're under the threshold for Irma at $194,000 married filing jointly. Now that person is alone, the survivor is alone, and they're a single person the next year, the threshold for Irma for a single person is $97,000.

So if the income doesn't change, but now there's one person filing as a single, they were under Irma before, and now they're thrust into it. So there's a whole lot of complication around these things, and we don't want to start planning for a death in the specific sense with an unknown date 10 years from now, or that kind of thing, but you bring up a good point is this stuff is all over the place, and they're hidden. So just by the fact that we're talking about what is hidden, and they're not hidden from me, I mean, I know they're coming and I can, you know, and us here at Cardinal, we can help you plan for them. So you know, and I know you, your own situation is like you just said, you're turning 65.

So inquiring minds want to know, I mean, I'm gonna get dinged with this. You did some planning around that, though, because you knew that you would. Well, yeah, I did. But my planning was so substantial that I couldn't let the Irma tail wave the tax dog. No, I'm going to get slammed with Irma, and I'm going to keep working. So I'm going to keep getting slammed for a few years, and then Rhonda is going to go on Medicare, even more slamming.

And I'm not that upset about it. I mean, I do quite well, and it's just, I got to pay for my Medicare. And by the way, it's a whole lot less than our health insurance. My health insurance right now is 1,400 bucks a month that my business pays.

So I'm thinking I'm kind of like Royce Reynolds, you know, like, oh, for the days I could pay Irma. Well, yeah, I mean, I pay 1,400 bucks a month for me, 1,400 bucks a month for Rhonda, and actually the business pays for that. So that's 2,800 bucks a month, and our insurance is not as good as Medicare and a supplement and a drug plan and Irma, okay? Right. And when you put all that stuff together, it's going to be about half. So I'm actually better off.

So I don't want to get people all upset about all this stuff. Same thing with Social Security. When you start collecting your Social Security checks, sure, you're going to have to pay some taxes on it. But you're going to be a whole lot better off with that check minus the taxes than you were without that check entirely. Oh, my goodness, yeah, absolutely. You know, thank goodness for the days I can pay tax.

And that's part of the deal, that you can look at all these as some kind of curse if you want to, but the other obvious situation is like, man, Lord, thank you that you give me the stewardship of all that you've given me. See, the fact remains most people don't sit down and do tax planning, forward-looking tax planning. They just don't, and that's a service that we provide. Yeah, yeah, well, again, we're just great running out of time before we ran out of show, but we just want to remind you, again, that this show is brought to you by Cardinal Guide, and so the easiest solution to your problem is 1-800-HANS. You just go to cardinalguide.com. It'll show you there how to contact Hans, and certainly everybody's got a little different situation, and it's really helpful to do some planning around these things. And so there at cardinalguide.com, there's also the Seven Worries tabs, which one of those is Taxes in Retirement, and all sorts of resources there, including the show notes from today's show, which are really helpful, and also the YouTube video along these lines, and of course Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. It's all there at cardinalguide.com. Thank you, Hans.

Yeah, 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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