2025 Tax Planning

This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com. With certified financial planner, Hans Scheil, bestselling 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 back, planner Hans Scheil. And today's a bit of a mouthful as the title of the show, but I think you're going to find that it's got some wonderful insight to it that we can all learn from. And, you know, I'm going to say the title and then kind of give you the biblical thing I was thinking about. So the title of the show is 2025 Tax Planning. And it's based on this idea of the investment income 3.8% surtax. Now, you may not be familiar with that surtax, which is a big part of the reason that Hans wanted to do this show today.

But at the end of the day, what's going on here is not only you got your tax, your regular income tax, but now if you go above a certain bracket, they're going to put a surtax on top of your tax. And as I was thinking about that, you know, in Matthew 6, which was part of Jesus' Sermon on the Mount, and he was in Matthew 6, really giving us ideas on how to not think so much about ourselves, but think about the kingdom. And so in thinking about the kingdom, he said in Matthew 6.20, don't lay up, it says, but lay up for yourselves treasures in heaven where neither moth nor rust doth corrupt and where thieves don't break in and steal.

And as I was thinking about that, I couldn't help but note that for my years through Hans, and I hope you've had a chance to listen to lots, but if not, maybe this would be your introduction to Hans. It shares so many amazing ways that if the intention of the money, if the purpose of what you're trying to do is a kingdom purpose, it's always tax-free. In other words, it depends on whether you consider who might be stealing or corrupting or moths, but depending on what you want to call what, if you do this other stuff, the taxes don't come off the top of a QCD, which if you don't know what that is, hopefully we'll talk about that a little bit in the show, or if you're giving it through life insurance or Roth IRA. It's so many different ways that with a little bit of planning and stewardship, if the idea is a kingdom idea, you don't have a 3.8% surtax, right?

You don't. I'm just sitting here thinking while I'm listening to you talking about that, is if you donate appreciated property or appreciated stock to any qualified charity, let's just use the church to say it, and you can definitely avoid the capital gains tax, the state income tax, and the 3.8% surtax. So let's dig into what this thing is. So what they wanted to do back in 2013, and they wanted to raise money to pay for the Affordable Care Act, okay? They wanted to raise tax money to pay for all the premium subsidies and all the money the federal government spends on the Affordable Care Act, and they put some pretty good size thresholds. They really wanted to ding the wealthy, and to a certain extent they were successful with this, but this also pulls in average people when they all of a sudden have a sale of some property or something. Say you had some farmland in your family that you bought from your family or you inherited, and it's substantially increased in value, and somebody comes along and pays you a lot of money for that, and you take it, and you're thinking, well, I'm just going to have capital gains taxes on that, but as I explained the thresholds, you could be somebody that lives off of $60,000, $80,000, $100,000 a year, and you're nowhere near paying this 3.8% surtax, but all of a sudden you have a capital gain that comes your way that's $400,000, you're going to pay this 3.8% surtax.

Unless you plan the sale and plan the money coming out of the sale properly, there's probably some ways we could help somebody in that situation if we can get a hold of you before you actually sell the thing. So what am I talking about here is that there's a 3.8% surtax that's on top of investment income, and investment income is going to include interest, like on your savings account or money market accounts. It's going to include dividends, capital gains, long-term and short-term capital gains, taxable annuity income that excludes IRAs, royalty income, and passive rental income. So what they're going to do is if you're over one of these thresholds, they're going to tack an extra 3.8% tax on your investment income, which includes interest.

So let's talk about the thresholds for a minute. Married filing jointly, you have an adjusted gross income of $250,000 for the year we're talking about. So if you're under that, no 3.8% surtax. For a single person, it's $200,000 is the threshold. And for estates and trusts, it's a little over $15,000. So they ding estates and trusts pretty hard on this surtax because the threshold is so low. So that's one way. Well, again, just for me, because you tend to back into the threshold idea, it sounds like, oh, well, that $15,000 would be better.

No, no, no, no. If you make over that $15,000 in your estate or your trust, then you're going to be eligible for the 3.8%. Again, most people are well under the $250,000 threshold unless you have some big event, as you were talking about. But actually, those are given all those people underneath that break. And that's where, again, for those of us who don't deal in these numbers all the time, just throwing that in their homes.

Well, yeah. I mean, if grandma has a $50,000 a year income that comes from interest income on a bunch of CDs and maybe perhaps some dividends on some stock, and she passes away, and it takes them a couple of years to settle her estate, and all that interest is accruing inside the estate, yeah, she's going to pay income tax, either capital gains or ordinary income tax on that money. But then she's also going to get this 3.8% tacked on there because the threshold is only $15,000 for the year. Whereas before she died, she had a threshold of $200,000.

She went anywhere near this. So this comes in and dings some ordinary folks. The people that are very well to do, a lot of them don't even know too much about it. Maybe they've heard about it, and it's kind of buried in the tax return as they send all the stuff to the accountant, and they just, boy, that tax bill looks high, but it always looks high. And some of that money is getting tacked on, an extra 3.8%.

So if it's in the list I described to you, you're going to have to pay it. Now let's talk about what's not investment income, and that would be wages, you know, and self-employment from an active trader business. Distributions from IRAs don't count for this tax. So that's kind of a plus, but unfortunately you're paying ordinary income tax on them anyhow at pretty high rates. Roth IRAs, you don't pay it on Roth income.

And I could throw in there life insurance loans, because they don't even mention it there, because they don't show up anywhere. So company plans are excluded, the sale of a principal residence. So there's a whole long list of stuff that's excluded.

People say, oh, I'm all right. Well, not necessarily, because all that stuff that's excluded counts toward meeting the threshold. And then they later, like I met this threshold this year, most of my income is excluded income for 2024.

Most of it is wages, income, it's stuff that's excluded, but all that stuff puts me over the threshold. And then I had some interest income last year, not a lot, but whatever it is, I got to pay ordinary income tax plus the 3.8%. So what do you think of that?

Yeah. And it leads me to a question like, and it is, the way it's designed, it's really hard to follow because, you know, they're saying we're taxing, we're only putting this on the 3.8% of your investment tax. But what it really is saying is, anybody who has a high income, we're going to really tax their investments, right?

That's a better way to put it. That's exactly the way it is. Or we're only going to put this surtax on your investment income, but we're going to count all your income toward meeting the threshold. Okay, right.

So the flip side of that is, if you have some investment income, but all your income is under the threshold included, then you're not going to pay this. So it's confusing as all get out. And I think they intended it that way. They're just going to suck some money right away from a certain group of people. And we can't do anything about that, whether we like it or not. It's really this show is about, we just want to help you plan and be aware of things when you're making decisions.

Right. And what you've explained in previous videos and in shows that we've done together, as well as the video on this show, I thought was really helpful from my understanding of how the world of this happened. Well, when they came out with Obamacare in some other ways, they had to show how they were going to pay for that in the bills in order to get them approved by Congress. And so part of the way that they showed that they were going to get these things paid for that were at that time was at the Affordable Care Act 2013 was they tacked this little 3.8 in percent in there to essentially from their standpoint, take from the rich and give to the poor. And so this would be a good time to remind you that the show is brought to you by, well, also to remind you in the second part of this show, like, man, you're going to hear some, you know, how do we take this and use it from a planning standpoint?

What are some of the things we can do to mitigate it in our particular income situations? And again, we want to remind you that the show is brought to you by Cardinal Guide, cardinalguide.com. And there you're going to find the seven worries tabs. And one of those worries is taxes, I'm sure, in retirement, which the good news for the most part, they're not as bad.

And so we're going to be talking about all that as well when we get to the end of the show. But here you're going to find the worry of taxes. And under that tab, you're going to find lots of videos and radio shows along those lines and the show notes from, you know, the video that they recently did on exactly this 3.8% surtax. And of course, there is also at cardinalguide.com, the Contact Hans or Tom page and Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement.

And so we got a whole lot more coming up on this 2025 tax planning investment income 3.8% surtax. 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 is 2025 Tax Planning for Investment Tax Income with 3.8% Surtax. And so with that said, Hans, we got to take a look at these brackets.

Hans Scheil Yeah. So this is just another level of a confusing tax code. And that's why people really don't look at this stuff. You just go on about your life, try to get your tax withholding, file your taxes, and just get on to the next year. And we make a business out of looking forward, not looking backwards. So we look at these tax brackets, and we look at where they are.

We look at our clients, how much income they have, some of the decisions they have in front of them, like Roth conversions, possibly buying life insurance out of IRA withdrawals. There's lots of moves that you can make with the idea of lowering your taxes over time, but they involve paying taxes right now. And so we're going to want to look at these brackets, and we're going to want to keep this 3.8% surtax on investment income, just kind of in the back of our minds. So we just look at an example with a couple that makes $150,000 a year between the two of them. They're right slam in the middle of the 22% tax bracket. So the 22% bracket starts at $96,950 and goes up to $206,000. So this couple, on about a third of their income, they're paying 22% taxes. Their effective tax rate is 17.1%.

And then we go over to a single person. If they were making the same $150,000, just one person, they would be in the 24% tax bracket with an effective tax bracket for tax rate of 20%. Now that's all on ordinary income.

So what's not ordinary income is capital gains and dividends. So they're taxed differently. So on a married couple, from $96,000 to $600,000 of capital gains, you pay a tax of 15%. And over $600,000, you pay 20%.

And so there's not a lot of people listening to the show that are over $600,000, but if you're there, we could probably help you pay these very high tax rates. But I just want people to understand this is as confusing as they look at this and they say, well, where that tax rate sounds low, but if it's a couple that has $150,000 of income, and they have a capital gain on the sale of something that might be a one-time event for them, that capital gain gets put on top of their $150,000 of income and just that piece of it is taxed at 15%. Then if they violated the threshold for the net investment income tax over all of their income by this capital gain, they're going to pay an extra 3.8% as investment income and a surtax on the extra money. So it sounds small, but you take 15% capital gains tax, you add 3.8% surtax if you're in North Carolina, you got another 4.5% estate tax. By the time what you thought was going to be a very low tax rate, we're approaching 25%.

I just wanted you to know that. The same couple, if they're over 65, they're pushing themselves into the Irma brackets. That's another surtax. Yeah, that's not really a percentage of income, but it's an increase in Medicare Part B premium. So there's all these little hidden taxes that get driven by the overall amount in your tax return, and then it's all taxed at different rates. Have I lost you, Robbie?

No, but it's kind of interesting. The way that it works is part of the confusion, but fortunately, I guess I've listened to it and watched it enough to maybe slow us down for a second to say, okay, you would think that, okay, if I make over this certain amount, I'm going to pay all this at the 25% bracket, but that isn't the way it works because it builds on itself. You have all this income that you don't pay any tax on because you're under that bracket, and then you've got income over to the next one that you just pay 12% on or whatever the percentage is, and then the next one you go up, and so at the end of it, you end up with what you call an effective tax rate, but it's a combination of the money that you made over this level, you paid this percent on, and the money you made over this level, you made this percent on, but then interestingly, when you go to the IRMA levels or to this 3.8%, then all of a sudden they throw that out the window, right?

Well, that's right. And I don't mean to confuse people further, but I'm just saying for the regular old tax code, it seems confusing, but it's confusing in a good way because at the end of the day, you may think, wow, I'm going to pay 25%, but you don't pay anywhere close to that because it builds on itself. Yeah, your effective tax rate or the percentage that you pay on all your income is always lower than your marginal tax rate, okay? But when we're making decisions, you're looking at the marginal tax rate because if we're making a decision like around a Roth, whether we're going to do a Roth conversion, and we're already filled up the 22% rate, then we're going to pay 24% on that whole conversion, okay? So yeah, it is confusing and you're kind of like, why do I need to know this stuff?

And you may be better off if you just turn the channel and listen to some music or something. Well, to me, there is do you need to know it? And here it is, I mean, and I think that's critical to why should I listen to it?

Well, I'll tell you why you should listen to it, okay? Is that right now, the tax rates are actually really low compared to what they were, you know, 15 years ago or whatever. And so, you know, a few years ago, they put in this new tax code. And so, we really have an opportunity to take advantage of these lower tax rates right now, but you don't want to misunderstand what's going on and how to keep under the threshold. And the number on the threshold is what you got to keep under in order to be effective, right at doing Roth conversions or deciding how to set up other sales and things based on really understanding, oh, wow, that's going to change the threshold I'm in and that particular transaction is going to be taxed at this rate, right?

Sure. That's what we do in financial planning. I mean, look, let's talk about the tax rates for just a minute here. So in 2017, they passed the Tax Cuts and Jobs Act and taxes went down in 2018. They also put in a sunset provision that said at the end of 2025 or the beginning of 2026, the taxes are going to go back to what they were in 2017. So that's what they call it.

They have a nice names for this stuff. Sounds real pretty, a sunset. But what happens after the sunset is tax rates go up. Nightmare.

Yeah, it's a nightmare. And so, we've been telling people for a few years, let's make able the sun shines, let's do a bunch of Roth conversions. Well, the rates are, these are the lowest tax rates we've ever seen. And we have a bit of hope now, after the election and the new administration, he has promised, you know, and campaigned on the fact, we're going to extend the tax cuts. He didn't say how far they're going to extend them because it's not really within his power.

It's partly within his power. He's got to get Congress to introduce a bill that says we're going to lower the tax rates or we're going to leave them like they are. You don't write a bill like that that says, oh, we're just going to leave them like they are. I mean, they actually need to write a bill with the current tax rates for so many years, but they're still going to have to sunset that. And the good news in all of this is there's hope that they're going to keep these rates low for some period longer.

Okay, that's good news. You still need to understand them, or you need to at least have confidence that we understand them. And, you know, you come to us, and when we're doing all your financial planning, Tom and I have this chart. Tom and the others in here, we have these tax charts and brackets and rates right in front of us all the time. And when we're going through people's money and looking and projecting in retirement and projecting income, we're including the taxes and the income projections. And we've got various sources within a person's money that we can pull from that have different tax characters to them. So we need to understand this stuff so we can think about it in our sleep.

You don't necessarily need to understand it that well. Because you try to do this stuff by yourself, you're going to miss something. I'm just trying to inform you of there's all these little hidden things that you don't really, that just kind of creep up when you do something large. Yeah, and when you do something large, you know, from my standpoint, that's why we constantly talk about cardinalguide.com, where you can contact Hans, you know, because, you know, with many counselors, plans succeed. And you know, that there are strategies, whether you're making a big sale or a big purchase, or doing a big conversion of some kind, or looking at, you know, wow, as so many people are, you know, how am I going to not run out of money? And that's where these things really come into play. Well, I mean, just like an example of a rental house, use your selling, that you got it rate depreciated down, it's got a low basis, and you got somebody that wants to buy it from you, they're going to pay you a lot of money. And, you know, we can spread that sale over three years by financing it.

That's right. And that's why I want to remind you that the show is brought to you by Cardinal guide, cardinalguide.com. And if you go to cardinalguide.com, as we always talk about, you have the seven worries tabs.

And so there are seven worries tabs, you're going to find income taxes, one of them. And by clicking on that, you'll see a series of shows, videos, all along the same lines, including this one with the same title, that's a video with a board and, and more details about those kinds of things. But again, for me, just a whole lot easier to go to the contact Hans page, and find out something, you know, that, that's for your particular situation, a particular transaction that you're interested in, you know, right this minute, that's what they're there for, they're easy to get a hold of, believe me. And there, you'll also find Hans's book there at cardinalguide.com, Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And so great show, Hans. Thank you, and God bless you.

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. 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.