Income Taxes: 2021 Tax Rates for Retirees - YouTube

Today's Cardinal lesson is talking  about tax rates tax brackets for 2021  

and our focus here is on retired folks and  retired people, people over 60, 65, 70, 75,  

and planning for this year and future years  to pay in federal and state income tax.  

I want to call your attention to the brackets  for 2021, but I want to start over here  

and explain this standard deduction. So  when the Tax Cuts and Jobs Act in 2017  

went in effect this was a huge change that I have  many clients that still don't really get this,  

okay, so if you're over 65, and you're a  married couple, your standard deduction is  

$25,100, and then you add to that $1,350  because you're over 65, so it's like $26,000  

is what you can just put down as deductions  on your tax return, so when you when you add  

up your mortgage, interest, the the taxes you pay  on your residence, your charitable contributions,  

most folks don't fall in where they can deduct  medical expenses, but that's a possibility  

for many retired people, it  adds up to way less than this,  

and so they're busy doing all this bookkeeping  and sending all this stuff to the tax person  

when they're just going to take  the standard deduction. Anyhow  

for a single person that's $12,550, and if  they're over 65, it raises it up to about $14,000  

of just standard deductions, so if your deductions  do not equal that amount or anywhere near it,  

you can basically quit keeping track of all that  stuff. Okay now where do retirees get their income  

from? I mean most of them have a Social Security  check, if they're a married couple they got two  

Social Security checks, and the Social Security  does not count in these tax brackets, okay,  

you are going to have to pay some  tax on your Social Security income,  

but it doesn't count in these tax brackets. So  let's just say that a person, a married couple,  

has like $40,000 a year in Social Security  income, and then they have another $30,000  

a year of other income, so between the two  sources they've got $70,000 a year to live off of.  

Now when you take that you'd say  well these people make $70,000,  

which they do, but for their taxable income,  the only thing it counts is that $30,000  

in addition to Social Security are separate  from Social Security, and then from that the  

standard deduction is taken, so it brings their  actual income or their taxable income down to  

like $5,000, so it's a, you know, it's just  people a lot, many times, I find are not really  

where they think they are on these tax brackets,  and you really don't have to really wait till  

you do your taxes to learn all this, and some of  you might not be interested in really a lesson  

in all this, and I don't really want to try to  get you where you have an expertise like me,  

I just want you to understand how  the game works, so as we plan,  

you know, the person, the couple, that I just  described is not going to pay a lot of taxes  

and they're not going to pay a lot of taxes on  their Social Security either just because of  

the way that's all figured. Now so the only  thing that's driving this number right here  

is these brackets like the 10% bracket is your  income after taking the standard deduction  

and so you you're in the 10% bracket and where  most retirees get their second and third incomes  

from are their IRAs or 401ks as they've built up a  balance and now they need to live off of it and a  

lot of them don't take anything out of their IRAs  because they just don't want to pay any taxes,  

when in effect many of them still in their 60s  could, or low 70s could, take some out of the  

Social Security every year and not, excuse me,  out of the IRA and not pay much taxes on it, and  

you know, they could take more than they've been  taking and still stay in a pretty low tax bracket,  

and so consequently when we sit down with  retirees that have a good Social Security check  

and then just some other income and  they really could have even more,  

they are reluctant to do that, and many times  we're going to recommend that they take out more  

just because it doesn't do much to their tax  rate to drive themselves up in these brackets,  

so the other thing that comes into play for  people, in especially in their low 60s, mid 60s,  

late 60s, just retiring, is the  whole idea of Roth Conversions, so  

we get many people that are all excited about  Roths, they got a small one that they started  

but they don't want to take any distributions  from their regular or traditional IRA  

until they have to at minimum distributions and  once we show them what a Roth conversion is and  

we do Roth conversions, usually over multiple  years, and we use these brackets, whether  

they're married or single, to make a determinant  of how much we're going to do in any given year,  

and so, you know, I just like people to  take a look at these to understand them,  

when you're working you don't have this  business of a Social Security check,  

I mean all your income is taxable, and so you're  just going to be in a different place in this,  

along with the standard deduction,  than you were when you were working,  

and so we do this in retirement planning for  folks all the time as we put together a plan for  

the future. Now when I look at these tax brackets  and I look at all the time I've been practicing,  

these rates are low, I mean it, just all the 24%  bracket for a couple has a cap of $329,850, and  

so if you've got somebody that is at $80,000 and  they're at the 12% bracket, besides their Social  

Security and or their other income, they're at  $80,000, they can go and convert you know $100,000  

of their IRA money or $200,000 to a Roth and it's  not going to drive them in a ridiculously high tax  

bracket because these numbers are just low. They  were made lower with the tax cut three years ago.  

I want to add something else is that these are  scheduled to increase back to what they were  

in 2016, that's going to happen in 2025 if  there's no change in the tax legislation. It  

was baked into this law that these low rates only  last until 2025, so just bringing you into some  

of our thinking and our planning and when we're  meeting people and we're looking at their income,  

their savings, their IRAs, their Social Security  check, and trying to figure out a way for them to  

live off of this stuff, sometimes it makes sense  to begin distributions earlier than you thought  

you would. Now you've also got the advantage of  long-term capital gains and qualified dividends  

tax, so that's going to be when you like if you  sell a piece of property, or you sell a business,  

or you sell a stock that you've owned for  longer than a year, you pay much lower rates  

on things you've held for a year more  or they come as dividends on stock, so  

the rate can be as low as zero percent, you  know, in other words, if people, a married  

couple, and their joint income just like as I  described earlier is less than $80,000 a year,  

their capital gains tax rate is zero  percent, so we have people that once we  

come in that they'll sell some assets just  because they can pay no federal income tax  

on them or they can take advantage of  a zero percent capital gains rate.So  

that's about all I have to say about taxes today.  I'm Hans Scheil, I thank you for listening.