You Make A Lot Of Money Tax

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This is the Truth Network. Welcome to Finishing Wealth, 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 Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. Welcome to Finishing Wealth, certified financial planner, Hans Scheil and Tom Griffith. And today's show topic you may think doesn't have to do with you, but I assure you that it does.

You have my personal guarantee. The name of this show is you make a lot of money tax. So you may initially think, well, I don't make a lot of money. Well, you might remember that in Luke 12, verse 48, actually, Jesus said these words. He says, to whom much is given, much is required. And when you think about that from a standpoint of the poor guy that was forgiven all that money in the parable that he taught, and then he went out and started to beat up this guy over five bucks, Jesus was talking about that kind of thing. And so when you think about it, what was the value of what you've been given? If you're a Christian and you know Christ and you have him in your life, then what was given was literally his life, God's son's life that you would have the ability to commune with God, but also to spend eternity with him. And so we've all been given much, much, much, much, much, and so much is required from some standpoints of being able to show the way so that more people will be able to make their way to the kingdom. Much is required, but also financially, you know, if you live in America compared to other places in the world, you've been given much. And even though you may not think this applies to you, oh, we've got some information that's going to be really helpful because I can tell you, I had no concept of this tax.

Never heard of it, never thought of it in my life until I saw their video on the subject, but Hans and Tom, jump on in there and enlighten us. Okay, so let's just get down the bare facts of this thing. So if when you file your tax return, if you're married, you file a joint return, if you're under $250,000 for all your income or right at $250,000, you're not subject to the net investment income tax. And if you're single, same thing, but it's $200,000 is the max. So if you're over that, you've got a possibility of paying this tax. So that's where Robbie's comments in the beginning, and Robbie really talked to us in the beginning, he says, this is really the right thing to do on a Christian radio show. I mean, we're, this doesn't affect that many people.

And, you know, Tom and I, well, first of all, we've been doing this radio show almost five years now. And we're just getting around to the net tax over the NIIT tax. And we find ourselves explaining this to clients when they are subject to this, and they're making decisions about the future. So it's a pretty confusing tax.

And most people that are over these thresholds, they either know nothing about it, or they've read something about it, they don't understand it anyhow. And they don't even know when they pay it, because they just give all their stuff to their accountant, and then they do their tax return, and they come up with a total, and they pay the tax and they move on. And so what it is, it's an extra tax that started in 2013. So it's not an old tax. And it is 3.8% on all your investment income.

So if you've got money outside of an IRA that you're earning, it's not in a tax-deferred status, it's in a taxable status, like interest on a savings account, interest on a CD, interest on bonds, capital gains from the sale of stock, or capital gains from the sale of some real estate. And this is the place that we see, one of the places we see, you know, what people would not describe themselves as, I make too much money, or the well-to-do. In fact, they describe themselves as the not well-to-do. But all of a sudden, they're in a situation where they're selling a piece of property, maybe they inherited years ago, or maybe their parents transferred it into their name to try to avoid nursing homes, and blah, blah, blah, blah, blah. And so they lost the step-up in basis of death. And all of a sudden, they're selling a farm, and they're selling the farm for $500,000. And the basis in the thing is $50,000. And so they've got a $450,000 gain that they're going to have to pay capital gains taxes and state income taxes. And they're going to have to pay the net investment income tax at 3.8% on top of all that.

So that's a place we see it. We also see where people clean out an IRA, so that somebody's trucking along and they have a very average income, and a very moderate income. And then they have one single year where they cash a bunch of money out of an IRA, sometimes by mistake, and then their income goes up significantly. And, you know, IRA money is not even, gains are not subject to the tax, but they create the threshold to drive the tax. So, I mean, I could talk all day trying to explain this thing to you, but it's just, so you've got this threshold, and for a single person it's $200,000, for a married couple it's $250,000.

If you're over that, then you don't pay the 3.8% on everything, you only pay the 3.8% on interest, dividends, capital gains, withdrawals of the interest on an annuity that are not IRAs, passive income. So it's just a portion of your income, but if you're earning interest and that's what you live off of, and you get kicked into this thing, you're going to pay this tax. Now, what's not subject to the tax are wages and self-employment. So if you make money from a job, like you do and I do, and Tom does probably, I mean, that's not subject, but it does create the threshold of the $250,000. Distributions from IRAs don't count. If you sell your home and you're taking advantage of that $250,000 exclusion of growth for a single person, $500,000 for a couple, the part that's excluded doesn't count for the tax. But we have people that sell their homes for more, then maybe all their savings is tied up in their home, and it's significantly appreciated, and they use the exclusion, but then there's more money than that.

They got to pay the taxes, and they also have to pay the taxes on the 3.8%, you know, this tax on the amount that's over that. So, you know, we don't really going to get into huge detail. We just want to let people know that it's out there, and it was created just to fund the government spending. I mean, it just was. And it started in 2013, and we think we'd be remiss if we didn't talk about it a little bit on the show. Right. And, Tom, it's really helpful to be planning, right? I mean, part of the reason we want to bring out the facts of what this stuff is is so that people will realize that they can create a plan to help them through anything, whether you end up with this tax or not, right?

Sure. And so I think this, along with a lot of the other tax planning we do, we don't want this to be the main driver of the planning we're doing. It's a factor.

We want to take it into consideration. But if you do everything you can to avoid this 3.8% tax, you might be missing better planning opportunities, better things to do. In other words, you know, one of the things that will drive this tax is if you have a lot of income from an investment.

It's producing a lot of interest. Well, you could look at that and say, well, let me just go get an investment that has really low interest paying, you know, returns. It won't cause me to go into this threshold, and so I don't have to worry about the tax.

Well, that is accurately true. Everything factual you have laid out there is true, but you're still better off getting the higher returning investment, even if you have to subject to this tax. And so, again, that along with a lot of the other tax planning we do, we don't want this to be the driver of everything. But in the context of a larger plan, if we can minimize this tax, we're going to do our best to do that. And I think, like Hans was saying, is even if your income on a regular basis isn't at that, we'll use a couple, 250,000 threshold, there are plenty of situations. I mean, I can list a sheet full of clients that have come in in the last year that are subject to this tax because they had a one-time event that raised their income in that year. And so, again, there's not a lot you can do about it.

Generally, it is selling property, making a big distribution out of the IRA for some other reason. I mean, there's things that can cause that. And so, it's not something that you need to worry about on an ongoing basis. But if you're going to do that in that single year, maybe you want to reduce the income that would be subject to this 3.8% tax in that specific year. And again, that's some of the planning strategies we'll get into on the second half of the show, where we can talk a little bit about how to minimize this kind of on an ongoing basis.

Right. And so, Hans, can you again give us a sort of a large view of what exactly this tax is? It has a threshold. If you're under the threshold, you're not going to pay any of this tax. You're not going to pay any of the 3.8%. If you're over the threshold, then only certain income is subject to the 3.8% tax. And that's mostly interest, dividends, capital gains, just where you're being paid interest, or you're getting a gain on money that you've saved.

And the amount for that year, you pay in addition to the tax you normally pay on your interest or on capital gains, they slap an extra 3.8% on it. I'm going to bring up one point here is this didn't used to be a huge issue with bank accounts. I mean, up until recently, interest on savings accounts at your bank have been paying next to nothing. So you might get, I don't know, $100, $200 of interest for the year on that. With the banks paying a lot higher interest rates, especially if you have a high yield savings account, which is what that's what I currently have my savings in. I mean, it's paying 4%, close to 4% right now, that starts adding up. And then that that is the type of income that is subject to this 3.8% tax. And so, in the past, you might have exceeded these thresholds, you might have had some interest, but the amount of tax you paid on that was so minimal as you didn't even notice it. Just be aware that might you might start seeing it, you know, more so in these these coming years with interest rates being much higher in these savings accounts. The thing that is just confusing to me, but again, I'm easily confused.

You know, and you've said this a couple times, but I just want to iterate. The confusing part is if you have an IRA, I guess whether it's Roth IRA or a regular IRA, and you have income in that IRA, that is not subject to this tax unless you are withdrawing a bunch of money. But still, that's not going to necessarily be considered income, right? Well, here's the deal.

If you're under 200 grand or 250 grand respectively, you're not going to pay this tax on any of your income. Well, we got to go to a break. But we want to remind you the show is brought to you by Cardinal Guide, where it'd be a great idea, as you can see, to get some help. To contact them, you can go to the contact page, obviously, at cardinalguide.com, as well as the seven worries tabs, which this one is going to be on tax. And so, there you're going to see the show notes. Very, very helpful to see both this video and the show notes on this. You make a lot of money tax.

So, we'll be right back with a whole lot more finishing well. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well, a certified financial planner, Hans Scheil, and today's show, the You Make a Lot of Money Tax. How to plan around that whole thing is what we're going to talk about in this segment. And so, Hans, you have sort of a case study to think about there?

Hans Scheil Yeah. I mean, what I wanted to talk about is just, I mean, we just had people in here recently, so we're going to talk about a case study of the very well-to-do Christian, okay? And I think that the Scripture that you quoted about to whom much is given, much is expected, I think these people are well aware of that. And I'm talking about people that are radio show listeners and very devout, and then they're coming to us for financial help, but they're probably coming to us because of our faith, and they know and they feel like they can trust us and we're going to lead them in the right direction because they listen to us for a while. And I just want to get at the point that there's a lot of Christians that we run into that have a lot of money saved, and they, most of them, tithe, and, you know, and they've tithed their whole life, and they still have a lot of money, you know, the 90% that's left, they don't spend all of it, and they're savers. And a lot of them are tax-efficient savers, so they've got these big, huge IRAs, and they're in here in their 60s, and they really don't need the IRA money to live. I mean, they, so they're sitting there, and they've got all this savings, and they don't want it all to disappear in taxes, they don't want to give it all away, and so they're concerned about it, but they can pretty much live off their Social Security checks. A lot of times, as couples, and because they just don't spend much money, and so just the premise that, you know, there's something wrong with being a well-to-do or rich Christian, or they're very few and far between, you know, maybe I'm the only person that, you know, had that premise, but it's just, from my perspective, it's not necessarily true. I've just met over the years here that I've been on Christian Radio, a whole bunch of people that are just savers, and tax-efficient savers, and they're very well-to-do, and then they're, now as they're facing retirement, and all the different perils that could come up with that, and then none of them enjoy paying taxes, they all want to pay the taxes that are due, but they want to leave enough to keep doing their tithing, and really leave something significant to their children.

So there, I'll get off my soapbox about that, is that we're here to help the well-to-do Christians, and then we're also, we do a tremendous amount of work where we end up doing it pro bono, because people come into us, maybe they've listened to us on the show, and they don't have a lot saved, and it may be a lot to them, but it's not a lot, and they, I mean, we work for free for a lot of those people. Now, I don't want to just have the whole world call me up asking for free financial planning, because we first got to kind of approve you in the system, but I'm always pointing that out to Tom, this is, you know, God's asking us to take care of these people, and we do, so, you know, it just, our work, and what we do, we don't really, it doesn't matter how much money you got, I mean, we're going to give you different advice, depending on the level of money that you have, and the level of your problems, but we're still going to give you advice and get you in a better place. Right, and when it comes to planning, you know, your strategies, you know, Tom, can you kind of take us into that side of it? Yeah, so on this net investment income tax, so we've sort of established what it is, what the thresholds are, so the question then comes up, okay, what do we do about it, how do we plan around this, and there are two, there's really only two ways, two planning strategies that you can take, and within those strategies, there's different ways to do it, but one is to keep your income below those threshold limits, like we had mentioned earlier, if your income does not exceed those thresholds, this tax is not applicable to you, no matter what happens with your other money, so that's one strategy, or one type of strategy. Another type of strategy is to reduce the sources of income that are subject to this tax, so again, if we look at which types of income you have to pay this additional 3.8% on, if we can reduce those and get rid of the income from those sources, even if you exceed those thresholds, you're not subject to that 3.8% tax, and so what I'm going to go through just here, sort of line by line, if you've watched our YouTube channel, we have a video on this, it's on our website, it has a nice chart on there that really goes through this, but I'm going to go sort of one by one of different strategies and how it fits, specific strategies that fit within those broader categories, and talk to you how that might work, and so when we have a client facing this, or someone facing this particular tax, we might consider doing Roth conversions, and so you might sit there and say, wait a minute, you told me if I convert money from my traditional to a Roth, that increases my taxable income in that calendar year, which could push me over that threshold, so all of that is true, this Roth conversion strategy is really a way to reduce the IRA balance now, and we're going to sort of marry that with reducing the sources of income that are subject to this tax in that current year, to avoid this tax in the future, so we're paying taxes now to lower the IRA balance, lower the required minimum distributions, the RMD is on that money, so for future years we might not be subject to this net investment income tax, so that's one type of strategy, another one is going to be, you're still working, contributing money to your IRA, 401k, HSA, any type of account that you get a tax deduction in this current year, and so if you're still working, and you make a contribution to any of those accounts, that reduces your income in that year, which would be a way to help keep you underneath that threshold if you're kind of right on the borderline there, now if your income is way above that, that's only going to be so helpful, but again for those clients that are right there sort of on the borderline, maybe we can do some of those type of strategies to lower your income in that current year, this is a big one, this next one is a big one that we use with clients that have a lot of money that are in savings accounts, that are now subject to these higher interest rates, that again are being subject to this tax, are tax deferred annuities, so we have other radio shows, we have other YouTube videos where we talk about MIGAs, which are multi-year guaranteed annuities, they're very much like a CD, where you put money there, it's for a fixed number of years, at a fixed interest rate, very safe, one of the big differences between a MIGA and a CD is the interest that's earned in that year is not taxable in that year, so if you have a large amount of money in savings that's driving up interest, that's taxed at this 3.8%, transitioning some of that into a MIGA, which now is we're deferring the interest on those, would be a way to reduce your income that's subject to this tax in the current year, the next strategy is a great one for lots of tax planning things, and it's the QCD, I know Hans has talked about this several times on the radio show, but if you're not familiar with what a QCD is, it's a qualified charitable distribution, there's some rules around it, you have to be over 70 and a half, so this is for someone who's already met that age requirement, but once you have met that, you were able to give to any qualified charity, churches is the main one we do it with a lot of our clients, is they give directly to their church out of their IRA and that does not show up on their tax return, it is not taxable to them, it's not taxable to the church, you got the tax deduction of the money going into the IRA or 401k while you were working, it grew tax deferred and then you give it away and no one ever pays taxes on that money, it's one of the best ways to avoid having to pay taxes on that, again if you're not already giving, it's not a reason to start giving, but again if you're tithing, if you're giving to other charities, this is a wonderful way to do your giving, and if you're above 70 and a half, I would encourage every listener to do your giving out of using the QCDs, there's a couple more here, so one of the other ones is municipal bonds, and so if you're, you know, you're retiring, you want to be conservative with your investments and you're holding a lot of bonds in your portfolio, which again if we look back to 2022, that it turned out to be that great of a strategy because they got hit pretty hard too, but moving forward, let's say you have a lot of bonds in your portfolio, the interest and dividends that the bonds are generating are subject to this tax, one of the types of income that's not subject to this tax is municipal bond income, the interest for municipal bonds, and so if you're able to, and again you want to make sure that whatever municipality is issuing the bonds are going to be able to pay, and so you, you know, don't just go out and put all your money in these type of bonds, but if you can do it in a diversified way, this is a way to reduce again the income that's subject to that tax. One other one that we do with a lot of clients that have a lot of investments that are outside of IRAs or 401k, they're in a taxable investment account, is called tax loss harvesting, and what this means is you look at a position, again you hope all your investments grow in value, but realistically, realistically we know that's not always the case, we did a lot of this in 2022, if we had a position that has a, is at a loss currently, and we have another position that's at a gain, we can offset those gains with those losses, so effectively we can sell those positions, not incur any capital gains tax, because we're offsetting losses versus gains, and again if you have no capital gains, that is a type of income that's subject to that tax, so it's a way to raise a lot of cash in the short term without having to incur that tax, and so I mean that's a pretty long list, I went through it fairly quickly, if you have some questions about this tax or you think you might be subject to it and you want to do some planning around it, give us a call, we'd be happy to sort of walk you through, you know, what are some ideas there, again I want to go back to one of the things I said earlier, this should not be the main thing you're focused on, this needs to be secondary to whatever the larger plan is, if you're only focused on minimizing taxes, you're going to end up making bad choices in other areas of the plan, so when we're doing plans, this is not, you're not, we're not setting out to be, this is the only thing we're worried about, but if we can minimize this in the broader context of an overall plan, we're absolutely going to do that. Well unfortunately we've run out of time before we ran out of show, but we're so glad that you tuned in today, as always we want to bring out that it's cardinalguide.com, there you can see how to contact Hans, Tom, and of course the show notes for today's show is under income, and of course also Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement, thanks guys, great show.

Thank 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.

Any statements or opinions are subject to change without notice. Investments involve risk, and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale, 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' bestselling 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 Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.