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Up Your Average is the “no nonsense” podcast made for interesting people who think differently. Learn to navigate your life with unconventional wisdom by tuning in to Keith Tyner and Doug Shrieve every week.
You can get bitter or you can get wise. And today, we wanna get more wisdom in your hands to help you navigate this. And, unfortunately, the wealthier you are, these rules a lot of times don't benefit you as much as the ordinary folks. But we're all about both people. Any way we can figure out how to help both of those, we're gonna bring it to you.
Caleb P:Welcome to the Up Your Average podcast, where Keith and Doug give no nonsense advice Good morning, Gimbal gang. We are
Doug:all three here. Last week, technical difficulties. I think the answer was I didn't have my sound settings right. So you guys were right. Man.
Keith:But welcome back, everyone. We did a tour of Wall Street for you, mainly of the New York Stock Exchange area and some of that history. And you could go back in our recorded ones, and you and I did that about two years ago. And I was sitting on the steps at the JPMorgan bank, and a homeless dude was smoking pot talking to me the whole time. It was a classic moment.
Doug:I I and we I think we've addressed this before, but the JPMorgan building is my favorite. And kind of like a, a letdown, an extreme letdown, but a win for capitalism. As I went to the JPMorgan building, maybe you were with me, Keith, but at the moment, it had turned into a Halloween store.
Keith:I don't even think it was open. Was it, Caleb?
Caleb T:It doing renovation or something.
Doug:Like, there are some things that you just shouldn't do that with. I I I love capitalism and all that, but there's some areas where you just gotta preserve the greatness.
Keith:We should research who owns that now because if the family owns it, surely the Morgan family wouldn't let that happen.
Doug:I don't know.
Keith:Yeah. I doubt they own it. Yeah. Because that would be that that would be like turning your property into a brothel or something. I don't know.
Keith:It's it's Yeah.
Doug:It was it was a sad moment. But on the plus side, it did allow me to go inside and check it out. Yeah. So that was that was pretty cool.
Keith:Yeah. I like that. I I don't think I've ever it's never been open where I could do that when I've been there. That that that part would be cool.
Doug:That was that was a win.
Keith:So I was doing a little research for our conversation today. And a number of years ago, there were these people that they started throwing tea in the harbor in Boston. You heard that story? Yeah.
Doug:And it didn't take much.
Keith:They threw their It
Doug:didn't take much to tick them off is what I'm saying.
Keith:Six point six to 8% taxes is what they estimate. Can you imagine that if our country got upset about paying six to 8% in taxes, the revolution we'd have? It would be unbelievable. Yeah. It would be unbelievable.
Keith:So as we're preparing this conversation, I I I was gonna get a picture of mini me a backpack is kinda what I think of. Like like, you gotta hoist this thing on and and carry it around. But if you look at a number of your investment strategies, you're you've got a mini me on your back. If you if you haven't seen the Austin Powers movies, pretend like I haven't either. But but you're hauling another another stakeholder around.
Doug:Okay. Right? Yeah. Good choice of words.
Keith:Yeah. And they they don't have any risk. Yeah. And and so I I think if I were going to say the gist of what we wanted to talk about today is disinheriting an unwanted error. Like, can I when I look at my traditional IRA or my traditional four zero one ks, I'm hauling around many me, which is your US federal treasury or your state income taxes, or maybe those of you that are in California, you may have to pay it on your city and and county?
Keith:Who knows? And so the more you grow those accounts, you may think you just have your two kids as your beneficiaries, but you've got a third beneficiary, and that's the government. And the more it grows, the more they're going along for the ride.
Doug:So true. Like, you think of it even with with your house, your home, and the taxes you're paying. The municipality is always the winner, and they have no risk in your house. I literally just hit
Keith:the pay for this building here. Yeah. And it is it is almost 3% of what we paid for the building is what I have to pay every year. Oh,
Doug:Marisu, thanks you.
Keith:Yeah. I take it back. It's 2%. So that's still lot. Ton.
Keith:Yeah. And and it's so much because we took we took our capital
Doug:Your capital. We put it
Keith:into the building to make the building presentable. So once we made it presentable, they they were still in the backpack. They're like, good job. Spend some more capital so we can assess that at a higher value. Yeah.
Keith:So that's just
Doug:the nature of game. Talking about.
Keith:That's the nature of the game. And you can get better or you can get wise. And today, we wanna get more wisdom into your hands to help you navigate this. And, unfortunately, the wealthier you are, these rules a lot of times don't benefit you as much as the ordinary folks, but we're all about both people. Any way we can figure out how to help both of those, we're gonna bring it to you on a Friday morning.
Doug:Our worldview collectively is, say, render unto Caesar, plus we love America. We love living in America. It's the best. Plus, let's be pretty shrewd. Let's be shrewd with what we've got.
Keith:I was explaining that to my son-in-law, Kevin, last night that neighborhood associations are another form of Cesar, right? Like the neighborhood associations put another so you have your your federal, your state, your city, and then an association, they start constraining the liberty, but they're also charging a tax. Yeah. And and I've heard some of those, like, in people in condos, the the fee for those get pretty they get pretty gnarly.
Doug:Yeah. Yeah. Well, let's let's get into today's topic, which I am thrilled to have Caleb joining us today. Really, this this topic was born out of a meeting that Caleb and I had with one of our clients. And, Keith, you and I were talking earlier that most of our great ideas in business life come from our clients.
Doug:They come from someone else raising their hand and saying, hey. Can we do this? And, then it's, you know, our love and responsibility to go after him. So Caleb joined me in a meeting this week, and he brought his expertise and and really, I think can open some new doors for people that might help them save a little money from Caesar.
Keith:Can I brag about Caleb a little bit? Is that allowed?
Doug:Tell tell everybody, like, why. Yeah. Brag on.
Keith:Well, I mean, the fact that he's my son is is worthy enough. But when I was in college, the accounting classes were really those were the ones to kick you back into marketing or management or something like that. Like Right. Those were the classes that separated the people that really had the the gist of what business is. And I had if I'd had a minor, it would have been in accounting, and I kinda liked it.
Keith:We've got a puzzle out there on the counter. Accounting's kind of like a puzzle. It has to the pieces have to fit in a certain way, and it tests your brain that way. And we were visiting, I think you were at this meeting, in Chicago. The guy that owned the last pinball machine manufacturer, I can't think of his name right now, But he had a kid at IU, and he was talking to us and he said, accounting is the language of business.
Keith:And I thought that's a great way to look at it. So accounting is the the language of business. Caleb went through, I think, all the accounting classes at Murray State with a's. Is that right? Straight a's?
Keith:And were you the top accounting student? Probably not.
Doug:What is the hardest accounting class?
Caleb T:It was advanced accounting, which entails I think it's business returns, but consolidated tax returns. So if Amazon owns a subsidiary, that subsidiary's information
Keith:has
Caleb T:to be in Amazon's return. So there's just a lot of information to memorize and different techniques, different ways to do the same thing.
Keith:Yeah. Some there's some mythological accounting things that go on in those kind of businesses, Doug, like the subsidiaries sometimes buy stuff from the mother company and the pricing and all that stuff gets really squirrelly. And so the fact that people have the brains to be able to organize that stuff is insane. Yeah. Very cool.
Keith:Yeah. So so that's my introduction and my bragging on Caleb. But I I think it's important for you to know that you have access to this brain
Doug:Yeah.
Keith:With a quick phone call if you're looking. We're not he's not a CPA.
Doug:We're not looking to replace anybody's CPA. We don't even do taxes here.
Keith:Yes. Yes. We did that at one time. And we're not planning to go back. We've been there, done that.
Keith:And and we and probably another plug before we jump into this is I was talking to a tax professional sometime earlier this year, and the process is I think I think it cost them, I forgot what he said, between 1 and $200 a return Yeah. To the technology company just to have the software. So, like, the the licensing is a good percentage. So if you're paying a couple $100 to your accountant for your taxes and he's doing it on a system, he's probably not making much. So so appreciate what they bring to the table because it's a big deal.
Keith:Absolutely.
Doug:Yeah. I I love the confidence of a CPA. Yeah. And so these ideas that we're gonna bring in front of you today, feel free to consult with your CPA and give us feedback on your situation. But I will tell you, I may have snoozed through an accounting class, but but this one just gets me really excited because it's and for some people, it's like free money.
Caleb T:Yeah.
Doug:And they don't even know it. So let's dive in. This is the senior bonus deduction. Are we sharing the screen, Keith? We are.
Doug:Are you ready
Keith:for the next one, Caleb? Yep.
Caleb T:Alright. So the this bonus deduction came into play this year with one big beautiful bill.
Doug:Which any time the government starts getting cute with the theme of a bill, I I always, like, flip flop it to it's the exact opposite. Like, the Affordable Care Act, not so affordable.
Keith:Well, that what was the one, the inflation when they did recently, the inflation reduction act or something like that? Yeah. It was like Yeah. Oh my. I better go buy some more gold.
Doug:Cash for plumbers.
Keith:I mean, the
Doug:marketing department is weak. But but this was this was Trump's one big beautiful bill.
Keith:I think Ronald Reagan said if if when in whenever they say we're here from the government's health, he would grab your wallet. Yeah. Exactly. Sorry to yeah. No.
Keith:I digest. Okay.
Caleb T:Yeah. So this is the first year with this, and it's available to anyone who's over 65 years old by December 31.
Keith:K.
Caleb T:And it's a $6,000 deduction per person. So if you're married and filing jointly and you both are over 65, that's $12,000 just on top of whatever you had last year. And the cool thing about this is if you're itemizing or taking the standard deduction, you can take this deduction.
Doug:Yeah. That that's that's pretty unreal Yeah. To be able to have it for both groups.
Caleb T:For sure. And all I saw was you just have to have your Social Security on your tax return, which you typically do. And the one thing is I think if you're married, filing separately, you do not get this deduction. And as of right now, it's only in place until 2028.
Doug:Gotcha.
Caleb T:They can renew it, but that's not guaranteed. Right.
Keith:I I've I've throw this in there. If you're married and filing separately, maybe you should sit down with your accountant and talk about that anyway. You're gonna pay higher taxes. And every time I've looked at that, it just doesn't make sense to be married and filing separately. And I know there's probably some some reasons involved there, but you're probably gonna save your family money if you can negotiate to file jointly.
Keith:Here's another example of it. Right?
Caleb T:All right. And there's a phase out to this. So like my dad mentioned earlier, that the higher income earners probably won't benefit from this. But you take your it's based on your modified adjusted gross income, which I didn't remember exactly what that was based on my tax classes. But it's basically your adjusted gross income, which you can find on your tax return, plus some add backs, which some of those are IRA contributions, tax exempt interests, or your Social Security benefits.
Caleb T:But for example, if you're married, filing joint, and say have a modified adjusted gross income of $200,000 you would typically get the $12,000 deduction. But you're 50% phased out of this. So you'd only get 6,000 of the 12,000.
Doug:So if you're under a buck 50 a year You're good.
Caleb T:You should be good.
Doug:Which is pretty generous phase out amount.
Caleb T:Yeah. So
Doug:if you're making with your IRA distributions, if you have a part time job, if you have some taxable income coming in under a 150,000, this is for you.
Caleb T:Yeah. And even if you're under $2.50, you still get something.
Doug:Yep. Good work.
Caleb T:So this is just a chart of all the deductions that a 65 year old can get. We've got the different filing statuses. And those are, I think, the 2025 numbers. So you have your standard deduction. And then there's another deduction for people 65 or if you're blind or both.
Caleb T:That's where the differences, like, between 1,600 and 64. That's where that comes in.
Doug:And these standard deductions really got ramped up a couple years ago. I don't remember when, but they really soared a couple years ago where not too many people itemize their taxes anymore.
Keith:I think it I think it was during the first Trump administration is when that happened. And the theory, I think, was you you wouldn't have to hire as many accountants anymore, but I still think it's so complicated you do. Yeah. And and and and so, yeah,
Doug:I think I that's when I remember it happening. So those total deductions for somebody 65 plus, you know, if you're driving down the road, I'll just give them to you right now. You're you're looking like somewhere around $23 to 25, and then if you're married filing jointly, 39 to 49.
Caleb T:Yeah. It's pretty huge. That is.
Keith:That is a lot.
Doug:And that includes this new bonus deduction. Single, again, $6, married filing jointly, each get a $12.
Keith:Yeah.
Doug:Yeah.
Caleb T:I I think the if you get the 12 k deduction and then some of the additional, I think it's just under 47. Yeah. So it's quite a lot.
Doug:That is beautiful.
Keith:Onward? Onward. Onward. Oh. Oh, it's Paul Williams.
Keith:Look at that. Well, how do I change this, Caleb? Can I change it? It it's it's Bridget. Well well, why He's not Mormon, is he?
Keith:Well, Bridget Oh, did he say that? Bridget passed away. Oh, no. Way, I'm Becky.
Doug:Becky's in the picture now. Alright.
Keith:Alright. And we because there are characters, just because he was 60 a few weeks ago, doesn't mean he can't be 68 today. Right?
Caleb T:Or that Bridget can't change her name. That's
Keith:right. We'll go by the middle name. Good job. That's right.
Caleb T:Bridget, Rebecca.
Doug:So in this example, we've got Paul Williams, 68, Becky Williams, 67. Tell us more about them, Caleb.
Caleb T:They're both retired, so they don't really have any income coming in. And their yearly Social Security income's around 41,000. And then for our listeners, I just put some numbers on there. So they had a IRA balance of $475,000 and a Roth IRA of $70,000
Keith:Okay. Tell us a little bit the difference between a traditional and a Roth IRA.
Caleb T:You want me to go?
Doug:Yep.
Caleb T:Yeah. So the IRA is coming from the pretax dollars from your yeah, pretax dollars. So you put money in and it can grow. But whenever you have to take the money out, you're going be taxed at whatever your ordinary income bracket is. Your Roth IRA, you've already been taxed when you've earned your income.
Caleb T:And you put that money into your Roth IRA, and it can grow tax free. So when you take the money out, you don't pay taxes on it at that point.
Doug:Right. Yeah. And most folks in their sixties right now, they have traditional side IRAs because the Roth really wasn't available for them. Definitely wasn't available for their four zero one k's, which, you know, now that is available.
Keith:So Yeah.
Doug:The majority of the people we'd be talking about are addressing for this senior bonus deduction that have large IRA balances. Yeah.
Keith:Alright. So they've got 70 in the Roth and four seventy five in the traditional. What are we going to do here, Caleb?
Caleb T:Yeah, so there are two different scenarios that we thought of with being able to convert some of that IRA money into your Roth to let it grow tax free. The first scenario is to just use as much of those deductions that you can. So if you go back one screen, they had about $41,000 of income. But most or all of that is not taxed. So their taxable income is, I think, zero.
Caleb T:Or I guess their adjusted gross income is zero or around it. But that's without using any of the standard deduction, the additional, or the bonus. So they Paul and Becky would have about 40,000 to $50,000 of deductions that they didn't use. Okay.
Doug:And most people just let those slide by.
Keith:Yeah. So we're assuming what is their taxable income right here then? Because that's what we're gonna see on the marginal rates, right?
Doug:Tax Social Security income is 41,000.
Keith:You're saying zero of that's taxable?
Caleb T:Yeah. Or even if it even if a portion of it is taxable, you have 46,700 of deductions that offset whatever is taxable.
Keith:Okay. And so when you whenever you see your marginal tax brackets like this, this is looking at your taxable income, not your total income or adjusted gross income. It's after all those things have been withdrawn from you, your total income.
Caleb T:Right. And So we're gonna look
Keith:at this middle column for
Doug:Yeah. And and before we look at that, Keith, you we did a podcast. It might have been two years ago, maybe a year ago. I can't remember.
Keith:It's podcast number 40 number three. Are you serious? Have that? Up your average. Yes.
Keith:I'm here to help. Dude, that is awesome. Okay.
Doug:So podcast what was it? Three.
Keith:Number three. You can go to YouTube or wherever you get your podcast, and we talked extensively about marginal tax rates.
Doug:Yeah. We did. And and Keith was high on this. It was awesome. We were talking about there's there's a few tax rates.
Doug:You've got a 10%, 12%, 22, 24, 32, 35, 37. And so the one that Caleb was wanting to focus on that I think is so good is most of these move up gradually, but that 12 to 22 is a huge jump. And that's what you addressed on the initial podcast.
Keith:Right. Because what the government would like you to think is that's only a 10% increase, but it's 10 percentage points. It's almost a 100% tax increase. And that's to me, that's the most diabolical part of the tax code because that is nailing the lower income people hard. Like, that's that's really putting it to them pretty pretty aggressively.
Keith:And and then you can see there there's there's staggered increases beyond that, but that big step is that's a that's
Doug:a tall order. And so most of our our clients who would take advantage of this senior deduction fall somewhere in between those two.
Keith:Well and and you probably yeah. You you could get all the way up right to the 24.
Doug:Is that right, Caleb? Is that you said $2.52
Caleb T:50. You might with those add backs, it might push you. Okay. So it's probably 22%.
Keith:Okay. So
Doug:and if you're driving down the road, the 12% bracket goes all the way up to 48,000.
Caleb T:For single?
Doug:For single. Thank you. And the married is 97,000. Okay? And so the '22, the jump to the 22 starts at 48 and goes to 103 for a single filer and starts at 97 for the married filing jointly and goes to $2.00 6.
Caleb T:Yep. So going back to the first example when they have, say, 40 thousand of unused deductions, you can convert $40,000 of your IRA to your Roth and still have a $0 taxable income and not pay taxes.
Keith:So you're saying this would be essentially a tax free Roth conversion for for this for the Williams family?
Caleb T:If they just went up to use their deductions. Yes.
Keith:Okay.
Doug:Yeah. Boy, that is like a is like a Pacers starting five layup right there. Yeah.
Caleb T:And the other example is, like you guys were talking, the big jump from 12% to 22%. It's maximizing those lower tax brackets. So going up to that 97,000 for the married filing jointly or the 47,000 for the single filers. And you're with this example, you still get your deductions, and then you're gonna pay a little bit of tax, about 10% or so on the excess that you go past your $0 of taxable income.
Doug:So who wins in this scenario is something I think about. And I I think, well, whoever's doing this, you you win because you you're paying a little less tax than you would to get money out. The big winner in this is your spouse. Because when when you die, your spouse moves from the married filing jointly the next year to the single filer. And so the tax rate bumps up.
Doug:Yeah. And so to have some Roth money as an option to take out is a is a big win for your spouse. And then the big, big winner is your future generations or whoever you wanna give this money to. To have money in a Roth would be a wonderful thing to inherit.
Keith:Yeah. And that's why I have the backpack here is the the Roth money has no backpack. There's no you prepaid. You prepaid mini me. You prepaid the backpack, and you took it off of those assets.
Keith:And there's no taxes. And and the heirs, now they have ten years to get the money out of the Roth once they inherit it.
Doug:So something I hear quite often from time to time is, Doug, I'm I don't need
Keith:to leave my kids any money. They're making more money than I am. Do you
Doug:ever hear that? And so the thought is, well, okay. That that could be true. And and
Keith:if they are making more money than you
Doug:are and you didn't spend it all, they're gonna really love that gift because they're in a higher income bracket than you.
Keith:Right. Yeah. So I I've talked with Caleb about this a little bit. Maybe you and I have talked about about family wealth. And and when you look at multi generations, you're saying, how do we get the most wealth for the generations?
Keith:That may fit into your mindset. You may want to do a Roth conversion even if you don't qualify for this deduction because there's some benefits to the errors for doing that. Because we've got a chart. If you're ever in Gimbal's kitchen here, you can see historical tax rates, and the the the government can can throw they can they can raise them high enough that you may wanna start throwing some tea in the harbor. Yeah.
Doug:And so on the Roth conversions, it it may or may not be right for you, but we would be happy to take a look at it. We're not CPAs, so we'd be happy to take a look at it. Bring your CPA in on it. And, you know, I think for your financial consultant, if you're working with somebody, you you might try and get this done before the December or else your adviser's eyebrow might start twitching.
Keith:I told somebody this week, the December 15, we will help you up until the December 15, and then and then it's a coin toss whether it'll get done. Yeah. We we prefer because we love Libby and Amanda. You do it before December. But Yeah.
Doug:It's a timely thing.
Keith:Yes. Yes. What else do we need to know about why do a Roth conversion kill?
Caleb T:I don't think much. I mean, one other small thing is Roth IRAs don't have RMDs. Good call. Yeah.
Keith:So you can by using the Roth conversion, you can control your income better by getting more money out of the RMDs because that math is the older you get, the more you have to take out of this thing. And if you can convert some of that younger to the Roth, it may give you more control of your taxes in your later years.
Doug:I think another plus is that if you do have a lot of money in IRAs and you do need to go to some type of assisted living scenario, taking it out of a Roth is a much less painful experience than taking it out of the traditional.
Keith:I would say the other thing to keep in mind with this new deduction is bunching. And we say that every once in a while. But if you itemize, then maybe you think about overextending what you're giving to the charity, say, for example, in 2025, and then cover your 2025 or 2026 gifts to those charities in 2025. So you jump up your total deductions. So you get that plus this senior deduction.
Keith:And then next year, you could probably take both the perfect. Standard and the senior deduction. So bunching is the idea of, you know, maybe in December, you hold off on those gifts and give them January. You choose which year you wanna bunch those gifts in, but that's an idea that is worth keeping in mind if you're right on the fringe of getting the standard deduction or not getting it. Anything else that we need to say?
Doug:Man, that was that was actually pretty fun.
Keith:Yeah. Yeah.
Doug:I I think you should take this to the Murray State tax class, and, those kids would just be riveted. They'd be so excited.
Keith:I know I am. I'm excited to help people. I am too. And I'd say the the last idea of getting the backpack off your back that I'll throw out there as a as a toss in today is if you do have charitable desires and you're aging and maturing and you have some things in your estate that are going to charity, maybe do them from your traditional IRA or traditional four zero one k because your family would much rather get the Roth and those non backpack type of tax things. Because your your stuff that's in your own name, you'll get a step up on death your cost basis on death.
Keith:The IRA, it's carrying those taxes to the next generation. So if you wanna give to charity, talk to us about naming those charities as beneficiaries.
Doug:If this podcast is is sparking interest, but it's a little muddy for you still, just give us a call, and and we would love to pair up the conversation with you.
Keith:And and not only that, if this podcast is sparking curiosity, send it out to all your friends. You guys have a great weekend. It's good seeing you.