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Retiree Tax Rates, Brackets, And Exemptions For 2024

Finishing Well / Hans Scheil
The Truth Network Radio
January 6, 2024 8:30 am

Retiree Tax Rates, Brackets, And Exemptions For 2024

Finishing Well / Hans Scheil

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January 6, 2024 8:30 am

Hans and Robby are back again this week with a brand new episode! This week, they discuss tax rates, brackets, and exemptions for retirees in 2024. 

Don’t forget to get your copy of “The Complete Cardinal Guide to Planning for and Living in Retirement” on Amazon or on CardinalGuide.com for free!

You can contact Hans and Cardinal by emailing hans@cardinalguide.com or calling 919-535-8261. Learn more at CardinalGuide.com. Find us on YouTube: Cardinal Advisors.

 

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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 with certified financial planner, Hans Scheil. And today, you know, when I list these off, you're not going to say, oh man, this is what I've been waiting for, but I think you're going to find this really, really cool. Some of the aspects of what we're talking about, and it is retiree tax rates, brackets, exceptions for 2024. And so I, when I was watching the video that they do on YouTube at the Cardinal Advisors YouTube channel, I was learning things.

I really had a clear understanding of tax brackets, and I think I ever really have, as one of the purposes of this show that we're doing today, as well as the purpose of the video, is to help us to understand how to take advantage of these lower tax rates in doing our long-term planning, and it has to do with how you fill up a tax bracket. And I didn't realize that. And as I heard it, I couldn't help but think about this story. It's in Second Kings, chapter four. Wonderful, neat story about this poor woman. She was widowed. Her husband had passed away, and she had two sons that her husband had gotten him so bad into debt that if she didn't pay the debt, that these two sons were going to have to go into slavery.

So you can imagine losing your son, I mean, losing your husband, and then two sons going into slavery. And so she goes to the man of God, which is Alicia, and explains her problem. And he tells her a very unusual story, but it has everything to do with these tax brackets. He says, go all your neighbors and all your friends and borrow as many jars as you possibly can. And of course, we don't know how many she actually got.

It doesn't say that in great detail, but we do know that she went and got a lot of them. And then he said, go into your room and begin to fill them with oil. And as long as she had empty jars, she had oil. But at some point in time, she ran out of empty jars. And at that point in time, the oil stopped. But then she, of course, went to the man of God.

He told her to sell the oil, and that would pay her debt and give her some money to live on. But the point being that I wanted to illustrate with this idea of tax brackets and faith, right? Had she had more faith, she'd have been trying to find a whole lot more jars, right? Because as many jars as you got, the more that you could fill, the more that the overflow would go to the next jar and the overflow would go to the next jar and the overflow would go to the next jar, which speaks to this idea of tax brackets, that the way that Tom and Hans explain this is that these tax brackets, you're taxed at the lower rate until you fill up that one jar, and then the overflow going into the next jar gets taxed at the next rate.

Wouldn't it be wonderful to fill up all those jars, though? I mean, the idea is, boy, to pay a lot of taxes is not bad if it means you get to keep a whole lot more money. And so understanding these tax brackets and having faith, right, having faith that God has provided for you your whole life and he is going to provide in the future, so plan for how well he's going to provide for you by having enough jars, you know what I'm saying, Hans? Well, yeah.

And so the simplest way to illustrate that is, you know, if you watch our video, we have these charts and we have the white board, which I'm looking at right now. And for 2024, married filing jointly, after you take your deductions, you have up to $23,200 of taxable income. You pay 10% taxes on that. So it's pretty simple to figure your tax bill.

It's $2,320 if you had exactly $23,200. And then when you jump into the next bracket, you don't increase, the next bracket is 12%, you don't increase the 10% money to 12% money. So in other words, when you jump into the next bracket and maybe make $1,000 more than $23,200, you're only going to pay 12% on that extra $1,000. The original jar you filled up or bucket or bracket or whatever is going to stay at 10% and it just builds. So the effective tax rate is always lower than the tax rate in your bracket. Does that make sense?

Oh, it completely illuminated. You know, I kind of knew what that meant. But the idea of that jar getting full and the overflow goes into the next 12% where you leave that $2,300 is that part's done and now we're going to go, like you said, if you had $1,000 and that's going to be another $120 to go with the other that you had, right?

Right. And so it, you know, it stacks up and I can't tell you how many people come into me and they've got a general plan put together of things. And maybe they've even done an Excel spreadsheet where they're planning their income, planning their social security, planning their withdrawals from their 401k.

And, you know, they're coming to me because they want to see what I think of it and see what I'm going to add for input. But a lot of, you know, if they put down, I'll just make this simple income at $100,000 a year and they put in, well, I put in 25% taxes or 25,000 for my taxes. That's about the tax bracket I'm in. And, you know, when I sit here and look at this chart, and this is a couple now I'm talking about, they're not going to pay anywhere near $25,000 in taxes and $100,000 of income because, for starters, they're going to take the standard deduction and that's going to knock $32,000 off of the 100.

So they're going to be down at $68,000. And then they're going to be on the 12% bracket for $23,000 to $68,000 and they're going to be in the 10% bracket for the first $23,200. I mean, the effective tax bracket of these folks is going to be around, you know, 11% or so or maybe even a little closer to 10% than that. So people have a tendency to overestimate taxes because they've just glanced at these brackets.

And so I think we've shown the JAR principle and the filling of oil in the jars to, you know, well enough just for this show. And what I want to move into is why are we talking about this today? What, you know, why does this matter to know at the beginning of 2024 what the tax brackets look like for 2024 and the tax rates and the tax brackets, because they do change from year to year. I mean, the tax brackets increased for 2024 by inflation.

We've known what these are since about November. And it tells us that you could make a little more money in the 10% bracket, the 12%. So effectively, this reduces your effective tax rate. And more importantly, that's not a huge effect for a lot of people, but we use these as financial planners because in retirement, if you've got some money in an IRA, you're able to manage these to a certain extent.

And I can give a couple examples of that. Right. Because with IRAs, that money hasn't been taxed if it's a regular IRA, right? But you can use that income or not use that income to whatever extent. And the more you add to it, obviously changes the brackets.

Well, sure. And so right off the bat, when we're doing financial planning for people, we want to see what tax bracket they're in right now based upon last year's income and just repeating whatever they did last year. But if people are retiring and, you know, last year doesn't so much matter, they're going to be living off of new sources of income. But regardless, we're going to see without our planning, this is where you are, okay, is based upon. So we're going to do a mock-up tax return.

Tom's real good at those. And we're going to just get a picture of how much taxes they're going to pay if they just never met us, if they just did things the way they've been doing them. And then we're going to calculate how much money they're leaving on the table. And what I mean by leaving money on the table is if they've got IRA money that they've never paid taxes on, or it's still in a 401k, and they are in control of when they distribute that to themselves. And the client, if they keep putting off taking a distribution because they don't want to pay taxes, that sounds like a good strategy because it lowers your taxes in the current year. But it's a bad strategy, because sooner or later, somebody's going to have to pay the taxes on this and a whole bunch of money comes out of the IRA in one year, it's going to push you way up in brackets, or push your heirs or somebody into a high tax bracket. So what we want to do with people is begin to distribute their IRA to them up to a certain level of tax that they can stand, or that they can see where in the future it's going to be much more. So in other words, if we had somebody that was making $50,000 a year, and they were living just fine off the $50,000 a year, maybe now we'll talk about a single person, and they were in a very low tax bracket because of that.

They were in the 12% for most of their income, 10% for some of it, and they were a little bit into the 22% bracket. But then they've got a pretty good IRA sitting over there, and they don't want to pull anything out of it. But we might recommend that they pull out $20,000, $30,000, pay the taxes, and just stick it in a savings account. We're going to do that for people that don't hold much savings, because those people that don't hold much savings is if they all of a sudden have an emergency where they need a lump of money for something, and they go to the IRA, that could be in the future, and it could be in a really bad position. So we want to shore up people's cash accounts before anything, not necessarily spend the money, the after-tax money. And we might just go up to the next bracket, which for a single person the top of the 22% bracket is $100,000. And so if this person is living off of $50,000, and that would be their taxable income, we can pull $50,000 out of the IRA, and stick it, pay the taxes, and then stick the balance in their savings.

Or we could do a Roth conversion. Unfortunately, we're up on the break. So we want to remind you that the show is brought to you by CardinalGuide.com. CardinalGuide.com is where you'll find, when you get to the home page, you'll see the seven worries tabs.

And today's worry is obviously about taxes. And so very cool, all these brackets, all the exemptions, all the things that we are talking about today for 2024, and some beautiful show notes that are there on this particular episode, as well as the link to the Cardinal Advisor's YouTube video on these same ideas. And these resources are all there at CardinalGuide.com, as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, most importantly, all the contact information for Hans and Tom.

So we'll be right back with a whole lot more about these 24 and all sorts of other interesting little things that you can find out about for next year. 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 with Certified Financial Planner Hans Scheil and today's show, we're talking about retiree tax rates and brackets and exemptions for 2024. And so Hans, like you're saying, these Roth conversions are really a way to walk in faith, like saying, well, you know, I've got this money that hasn't been taxed, and by walking in faith to go ahead and get it taxed at these lower rates, this is the very money that people are leaving on the table.

Well, it is. And, you know, what they're leaving on the table is they could have pulled it out of the IRA at much lower tax rates than they're going to be in the future. At least that's what we believe is that in 2026, if nothing is done by Congress and signed by the President in terms of continuing to reduce taxes, the rates come racing back to what they were before the tax cuts that were back in 2018. So that was part of the original bill that said this thing, this party only lasts for eight years, and at the end of eight years, the ninth year, it goes back to what it was before the tax cut. And so what the effect of that is is not pretty. And so there's two more years of these low rates.

Now that doesn't mean that it's going to be awful after that, it's just going to be more. And so my thinking is you got 2024, because it's the beginning of 2024, and then you got 2025, so if you're going to do something to take advantage of this, you know, you really ought to get started this year and you can spread it over two years. And what I'm talking about is that picking the amount of tax that you're willing to pay to either do a conversion or just do a distribution and put the balance in savings so that you can spend it tax-free later, it's choosing to pay taxes at what appears to me to be pretty competitive rates.

And so I'm going to give you an example of what I'm talking about. So for a single person, the top of the 22% tax bracket is $100,000. So you can make up to $100,000 of taxable income, and that's after deductions. So you have $100,000 of taxable income, the highest rate you're going to pay on the last dollars is 22%. And then the next bracket above that is 24%, and that is $191,950. So for a person that's short of the 100 grand and they have a bunch of IRA money that they need to sooner or later move over to taxable usable money, they could choose to say, well, I'm accepting of 24% tax brackets, so we're going to voluntarily raise my income through Roth conversions or IRA withdrawals up to $191,000. And I mean, we do this for a lot of people, and we're going to spread that over two years, and we could get about, you know, $90,000, $100,000 times two out of the IRA. So we're tackling a problem early that is going to be more costly later. Okay?

Absolutely. Now, I want to shift gears here a little bit. I want to talk about the standard deduction that was part of that Tax Cuts and Jobs Act that started in 2018. I don't know if most of you will call this, but the standard deduction went way up where, you know, it's now reached in 2024 for a couple both over 65, $32,300. And for a single, it is over 65, is $16,550. So instead of listing your home mortgage, your taxes, your charitable contributions, you just take the standard deduction, and, you know, that means your first $32,300 for a couple is tax-free. So in all those examples I was given earlier, you know, you deduct, if you're a couple, you deduct $32,300 before you get to the tax charts over here. Now, I just have a question.

I thought I would jump in. The $32,000 number that you're talking about, that's for retirees, is that different for a regular person before they're retired, before they turn 65? Yeah, so the $32,300 is for a couple both 65 and over. Okay, that's what I thought. If they're married a couple and they're both under 65, it's $29,200.

So they give you some extra standard deduction. What if it's like me where it's 50-50? Yeah. You know, Tammy's not 65 and I'm 68, so wow. It's actually the way we're gonna be this year because my wife is one year younger than me, and I'm 65. So see, I didn't say her age on the air, I just said her age when she's younger. So how does that work when you're 50-50?

Is there another way? Well, the way it works is it's actually you take the $29,200 and you only add $1,550 to it, so that would be $30,750. Okay, all right. That's what you get. All right.

Okay. And so, I mean, I just want to take that into account and where a lot of people miss this is with their charitable contributions is that, you know, we don't give money to the Lord and tithe for the tax deduction. I mean, that, you know, that's just kind of an afterthought. But when people start seeing this, that they're not even taking a tax deduction for their charitable contributions anymore because they don't have anywhere near $32,300 in home interest, you know, state taxes and charitable contributions.

And so, I mean, that's a lot of people. And so they don't really, you know, you can look at this two ways. You can say you don't get to deduct them anymore. That would be one situation. The other situation is say you get a credit for a whole lot more because $32,000 is a lot of money to be. Deducting from your income, right? Right. And so, now, there's another thing.

We've done other shows on this. There's this thing called the QCD, a Qualified Charitable Distribution. If you're over 70 and a half, you can donate, you can do your charitable giving through your IRA and never pay taxes on the money. I mean, it's just, now, don't go doing this on your own.

You want to make sure you do everything properly if you want to call me to do that. But people that are 70 and a half or beyond and they have money in an IRA, they can donate through the IRA and effectively get a tax deduction or not pay taxes on the money they give because it came from the IRA and take the $32,300 standard deduction. So that's another show. But there's so many ways that we use these charts and the tax code to just turn it in the favor of the people that we're working with. So the way that you actually get the tax break on that, just for my clarity, I guess, that if you do your charitable giving, like, normally, every week or once a month or something like that is the way you've been doing it.

Obviously, that's after-tax money that you're using that you're paying, right? But if you were to do a QCD for your entire year, or I guess you could do 12 QCDs, however you wanted to do it, but it's got to be the first thing, first distribution of the year, right? And so I guess you just- If it does, if you want to count it as your minimum distribution. So you can just give away your RMD or your minimum distribution, but that's at 73 or later.

You can start this at 70 and a half. So we start covering a lot of areas, but the answer to your question is yes. The tax advantage of this is, you know, let's say you were given 5,000 a year, and you were putting 100 bucks a week in the plate, okay? And you instead take $5,000 out of your IRA, and you give it directly to the church, and you do that properly. Again, I want to say there's a lot of steps.

You miss them. If you do it wrong, you're not going to get the tax-free deal, but you do your giving from your pre-tax IRA, and it never shows up on your tax return and counts as your RMD, and that means you can give more too as well. Once people figure this out, then they can give more, and that's a real blessing. Right, along with the larger standard deduction.

So you know, another question, just because I'm that way. Are the larger, you said everything's reverting back in 2026. Are we losing our big standard deduction in 2026 too? Yes.

Wow. It goes back to the way it was before 2018. All of this stuff reverts back to the old code, and then the old code is going to be adjusted for inflation for eight years, just like these brackets are adjusted for inflation for 2024. So they're already preparing that. Now, the thing about that is that is going to happen if they do nothing, which I think there's a pretty good chance that they do nothing, because they can't seem to get anything done these days, because they can't agree on it. So this is all baked in the law.

I mean, it's just the sunset, and so it's all going to change. The QCD is not going to go away, so you're still going to be able to donate from your IRA. That's not part of the Tax Cuts and Jobs Act, okay?

Right. But the standard deduction is going to go back to what it was beforehand, and I don't think it's going to include any more your home mortgage interest and your charitable contributions. It's just going to be the standard deduction.

I'm not sure about that, but I'll have to go back and read what it was eight years ago. And unfortunately, we really have run out of time before we got so much show to do, but the good news is there's a video at Cardinal Advisors with this same exact title of retiree tax rates, brackets, and exemptions for 2024. With the show notes, all that stuff, it's all there at cardinalguide.com.

Cardinalguide.com has got the Seven Worries tabs, and this again is under taxes, and there you're going to see the Cardinal Advisors video there, as well as, of course, Hans' book, The Complete Cardinal Guide to Planning for and Living Your Retirement, and of course, their contact information, because you can tell this stuff ain't easy, but it's worth getting some counsel, you know, to really help us all improve our faith. So again, thank you so much for listening today, and thank you Hans. Great show.

Thank you, and God bless you. The opinions expressed by Hans Schile 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. Once again, for dozens of free resources, past shows, or to get Han's 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.
Whisper: medium.en / 2024-01-06 10:28:20 / 2024-01-06 10:38:42 / 10

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