A lot of the things we talked about today, some will apply to an individual, some won't, but I think it's good to have somewhere folks can come to and just listen to what's pending in the economic environment and have some idea of why. Hello everybody and welcome back to Keene on retirement. I'm your co host Steve Sandusky and with me as always gentlemen, Bill Keene, Matt Wilson, I was your Thanksgiving. Well, I'm still recovering Steve.
Well, I think I think we all are now. Did you guys get your Reese's pie for Thanksgiving this year? Oh man, I saw that released. I sent the link to my wife because I love Reese's peanut butter cups.
She actually went online to the person's website and they were sold out and then within like two days I saw an article that they're on eBay for $500. This article said they made 3,000 of these, no plans to make anymore. So I guess that was the item to have for Thanksgiving in 2021. But he didn't answer your question, Steve.
Did he get the pie? That's the question I did not. So Amy then told me that she found a recipe. I asked her to make it.
She didn't make it. And here's why. This is why she didn't make it. This pie, it's 7,680 calories the entire pie.
That's what like seven Big Macs are. Yeah, I don't know what the equivalent is, but we're not supposed to eat the whole pie. Well, it's Thanksgiving. I mean, you don't want to have leftovers.
Now, is this indicative of the inflation that we're seeing, the price of this pie you mentioned or is this supply chain issues? I'm looking for reasoning behind this. Well, it sounds like it's a little bit of both. If you ask me, yes, it does.
Or are they playing like Rolex watches do and only produce so many that the price gets driven higher and higher? I mean, that's a common thing, a strategy that these brands do. They just release a little bit, keep demand high and price is high. There's a lot of money to wash out there in the system right now.
So this is troubling to me that something like this can go on. But I guess we'll see how it plays out. All right. Well, guys, we're going to dig in here today and we're going to talk about a few things that are related here.
We're going to be talking about some of the increases in premiums and tax brackets and contributions and exemptions and Medicare. So a lot of different things, IRAs, 401K. So Matt, why don't you kick us off here. Speaking of inflation, the IRS in November releases their inflation adjustments every year.
And also Medicare does. And so we have that data. And as I was looking through the numbers, I thought it would be interesting to talk a little bit about the history of IRAs and Roth IRAs. Part of what we're going to go into is the contribution limits and the things that are changing for 2022.
I don't think we've ever really covered well. Why do we have these individual retirement accounts? How did we get there and when did they even start? We did an episode a few years back on the 401K, and we talked about the history of that.
But individual retirement accounts were introduced in 1974. They're going to be about 50 years old here pretty soon. And it was part of the Employee Retirement Income Security Act, ERISA. And the original rule around these individual retirement accounts, too.
Either of you recall what the contribution limit was when these were created. That I do, because I wrote about this in my book, King on Retirement. It was $1,500 at that time. There's two parts to it.
Do you remember the other part? Now you're pressing me. $250 for a non-working spouse, if I recall. That I don't know.
What I was looking for is taxpayers could contribute up to 15% of their annual income or $1,500, whichever is less. Oh, you were trying to... I had it right. But you were looking for more detailed.
Yes. 15%. It's like, well, that's a high number. Of course, then whichever is less kind of changes the calculation there.
And it would reduce your taxable income. We're all in favor of that, right? Let's pay less tax today to further tax bill into the future. A lot of our episodes are about tax planning.
And how do we make a decision with the information that we have today to help us minimize our future of tax reliability? The IRAs have changed over the years. Different rules came into place in 1981. The Economic Recovery Tax Act allowed all working taxpayers under the age of 70 to contribute to an IRA regardless of their coverage under a qualified plan.
And that's when they raised the amount to $2,000. That's right. And actually, I'm seeing here 250 on the behalf of a non-working spouse with that rule in 1981. Now, do you know what else they passed in 1981 as it relates to tax brackets?
Any guesses? Put this on the spot. Stumped. Yeah.
Well, I wouldn't expect you to know this unless you were just a tax history buff like I am. They lowered the highest marginal tax rate from 70% to 50%. 70% was the one of the highest brackets ever. Is that correct in the US?
It was up there. And how many people actually paid that because of A, their income was at high and B, they weren't able to take advantage of other deductions that wealthy folks were eligible for back in those days. Because back in the 80s, I think there were a lot more tax shelters than there are now. That is a very good point.
Steve, I've seen charts and data that looks at effective taxes. So that's basically what you pay on an average of all your income. And it's been pretty steady over 50 plus years. And the highest brackets are in that high 30s range.
So looking back when rates were still 70% of the highest marginal bracket, on average, people were paying somewhere in the mid to high 30s because of all these different tax deductions that existed back then that don't exist today. Yeah. And that would be fun actually to do an episode at some point just talking about taxes, tax brackets, how they've changed and evolved over times. And really just the thinking behind taxes and why are we paying taxes and why do we have such a divide in what should be the proper rate that people pay?
I think that would be an interesting episode to do a little deep dive on some of the history there and the thinking and why we have this pendulum swinging back and forth depending on which party is in power, lower taxes, higher taxes. Steve, on our own, you're influenced against Steve Forbes on our program to talk about his flat tax idea about that. Yeah, he's floated that for decades now. Yeah.
Well, in 1986, the tax reform back was passed, which phased out the deduction for IRA contributions among workers covered by employment based retirement plans. So the last act in 1981 allowed anyone under the age of 70 to contribute to an IRA, regardless if you actually had access to retirement plan, then they changed that in 86. And that's actually how it works today. If you have access to a retirement plan and your employer, you can still contribute to a traditional IRA.
You just have income limits that you have to be aware of whether or not that contribution is deductible or not. It phased out for people with income more than 35,000. Now, we talked about these contribution limits starting at 1500. You know, we mentioned 2000.
Current contribution limit in 2021 is 6,000. It's actually going to stay at 6,000 for 2022. No inflation adjustment to that. So I did the math because we aren't going to talk about inflation.
You know, these inflation adjustments that the IRS is going to provide. Since IRAs were established in 1974, the contribution limits have gone up on average about 3% a year. I never really thought of it. I was just like, wow, I wonder how much those have gone up 1500 to 6,000.
It doesn't sound like a lot, but it's average, the rate of inflation. And they introduced the catch up provision at some point in there. And today that catch up provision, if you're over 50, is that still standard $1,000? Still at $1,000.
In 2021, it's $1,000 in 2022. They're also leaving that at $1,000. And that was introduced in 2002. They added that additional catch up provision.
Now, kind of next tax legislation that we had was in 1997. I'm sure you both recall what that was. Taxpayer relief, Act of 1997. That's right.
The Roth IRA was introduced. Yeah, it was originally called IRA plus. The idea was proposed by Senator Bob Packwood of Oregon and Senator William Roth of Delaware. And actually it was proposed in 1989, this IRA plus.
They finally got it passed in 1997. They went with Roth instead of the Packwood IRA. He gave up on what to name it after himself. So that was the next kind of major tax in a change when it relates to IRAs.
So it's kind of an interesting to kind of know about the history of where these come from. But those Roth IRAs, as we've talked about, are great tools. You can make contributions on an after-tax basis. You don't get any tax benefit today, but then you also don't pay any taxes in the future.
I've been a business for some time when this was all introduced. And a lot of the big brokerage firms were using this Roth IRA as somewhat of a sales tactic recommending. I'll never forget this, recommending folks move all of their traditional IRAs over into Roth accounts because the conversions were allowed back in 1998. I didn't have any clients move all of their assets out of an IRA into the Roth and take that huge tax aid up front.
But many folks did that. And that was when they started allowing you to, let me think of the terminology, unconvert. Yeah, recharacterize. That's the formal term, official term, recharacterize, because folks moved large amounts of money out of their IRAs, and then we went through the Asian crisis and the 2000 tech bubble.
They paid tax on this large amount of money and then had their accounts go down substantially, 30, 40, 50% in some cases, but they paid tax on the higher amount. So by allowing folks to recharacterize it back to the way it was, they reversed that tax. And then if someone wanted to reconvert, they could reconvert at the lower values. It was really quite an interesting time.
But again, at some point in our episode today, we'll have to get into what actually is going on today. Now, they didn't allow them to reverse the investments that they made though, right? No, no, they didn't even get the investments. They still lost the money, whatever it was in the downturn.
Yes. Yeah. I think I recall you were able to spread the conversion over four years. That's right.
That's part of the reason why people were thinking, hey, I can spread this out. Yeah, interesting enough, kind of where we've gotten this. It proves to us, though, there are a lot of rules and they're always changing. I mean, these are just some major tax bills that we talked about over the course of the last nearly 50 years, but the rules are kind of constantly in flux.
You have to be paying attention to these things, or at least working with somebody who's paying attention to them on your behalf. And every person that we work with has IRAs, probably IRAs. Yep. For one case, so it's very relevant to our listener base.
So for today's episode, talking about the inflation adjustments for 2022, now, people are not going to like this information. And I'm sure there's some people who've already seen it, and I'm sure there's going to be a good number that will hear it on the episode and probably not believe it or not like it, and then we'll find it out in January when they get their statement from Social Security. But Medicare premiums are going up by $21 in 60 cents. Is this why you opened the show talking about 70% tax rates, Matt, trying to set perspective here, like, okay, we could be back there.
But so this stuff's not so bad after all. I guess you didn't make these rules. So folks can't be met. You're just a messenger.
I'm just a messenger. Exactly. Just don't get mad at me. This is what we've got to deal with.
But Medicare premium is going up $21.60, which is a 14 and a half percent increase. Now, that isn't all just because of inflation in 2021. And that's just per month, right? Yes, per month.
So it'll be $170 and 10 cents for the Part B premium. And that premium, of course, as we've talked about in other episodes, is subject to Irma. So as your income increases, you might pay more. That threshold did go up in 2021.
You're not subject to an Irma surcharge. If you're a single filer and your income's less than 88,000 in 2021 and 176,000 if you're married. So for most people, you're not subject to an extra Irma surcharge in 2022. They did inflate those.
That first Irma bracket starts at 91,000 for an individual person, 182,000 for a married couple. And Matt, describe again what Irma is. Irma stands for the income related monthly adjustment amount. And so that is not your friend.
It's Irma is not your friend. That is right. Every December, individuals that are on Medicare get a letter that states what their premiums are for the next year. And that letter will tell you whether it's just you're under the regular Part B premium or if you're subject to this Irma surcharge.
And what they do is they look at your tax return from two years prior. So your 2022 Medicare premium is based on your 2020 taxable income. And if your 2020 taxable income is above, as I mentioned, that 91,000 for single, 182,000 for a married couple, well, now you're going to pay more. And there's multiple brackets.
So you can pay anywhere from $238 all the way up to $578 per month for your Medicare Part B. Something to just be aware of. And it's a cliff too. You go $1 over, you're paying this extra surcharge.
It's just for the calendar year. So it's only for 2022. So again, in December of 2022, you're going to get a letter that says based on your 2021 income, what your 2023 Irma surcharges if you have one, because if your income went down, well, then you may not be subject to the surcharge anymore. Interestingly enough, that bracket went up three and a half percent.
So we had Medicare go up 14 and a half percent for your Part B premium. The Irma surcharge bracket went up about three and a half percent. I just always find that those little nuances kind of interesting. They don't always make sense.
Now, part of the reason Medicare did go up as much as it did in 2022 or is it's going to go up in 2022 is because in 2021, Congress took action and lowered the amount that Medicare was going to go up anyway. So they limited it to only an increase of $3. And it was related to all the COVID situation from 2020. So they're catching that back up in 2022.
So it isn't all just because of inflationary costs. There is some of this catch up from 2021 that really wasn't applied because of COVID in 2020. It is reflation like you rolled out several episodes. Yes.
Yes. Now, some of the other things that were announced, the IRS in November also comes out with their inflation adjustments for the next year. And they raised the standard deduction that went up to $25,900 from $25,100 for a married couple. So that's an increase of $800.
You know, a single filer is exactly half that. And that increase, again, I always find this interesting was 3.2% over the previous year. Now, we talked about in an earlier episode that well, so security went up 5.9 based on the CPI, the consumer price index, you know, it's a basket of goods and services that a working individual purchases. And it's a basket that the government tracks, you know, whether you believe that's accurate or not, that's just how they calculate it.
Well, why aren't they using that same 5.9 for the tax brackets? They want more revenue. It's a sneaky way to do it. That is true.
They actually used a CPI U, which is a little bit different than the CPI W. They have all these CPI benchmarks. So I don't want to confuse everybody, but it's a basket of goods and services that an urban wage earner would spend money on. That's what the use stands for.
The CPI W is the working individual, not a whole lot of difference there. So again, not to get into the nuances, but in 2017 with the passing of the Tax Cuts and Jobs Act, they changed it. So they actually did used to follow a similar calculation that the Social Security Administration did in 2017, though. They changed it to what's called a chained CPI.
So what that does is that averages inflation over a 12 month period. And essentially, it ends up being lower. And I recall when this got passed, you know, we've mentioned it briefly in 2018, it's a hidden tax increase because if you think about, well, if changed CPI is a little less than the previous calculation, your income, if it rises with the rate of inflation, is going to increase, which is a good thing faster, but you're going to get into the higher brackets quicker. Yeah, that's what I meant, a sneaky way to increase tax revenue without actually having to pass some big legislation.
It was just something new, you know, just got stuck in there in 2017 where they just kind of threw in this chain CPI. Is that because the chain CPI is going to lag? If inflation is increasing, the chain CPI is going to lag because it's basically averaging it over the course of a year. That's right.
But then with the reverse be true, if we had deflation, then it's going to overstate because it's going to be coming down slower, or the bracket range is going to be coming down slower. Now, rarely do we have deflation, so maybe we don't have to worry about that. I mean, I think, yeah, they kind of probably when they pass this, they figure that's probably not much of a risk. And Congress is always going to change it in their benefit, or at least they're going to be considering if it did work out in their favor.
You know, there's the old saying that there's only what two things certain in life, death, and taxes. I think it should be death and taxes are changing. That's with certainty. Yes.
Well, you know, on that front, the estate tax exclusion for 2022 is actually up over $12 million per person, which was an increase. So prior in 2021, it's $11,700,000. It's a calculation which they do have, you know, again, tied to this inflation calculation that they use as per individual. So a married couple, you kind of can double that to over 24 million.
That's quite a large number. Now, there are pending some bills. Again, we've talked about that in previous episodes, but nothing's been passed yet. They've passed an infrastructure bill, but there was really no tax related aspects to the infrastructure bill.
This kind of social infrastructure, whether debating that currently, and it's been very fluid. So there's been talk of increasing the top bracket and changing capital gains tax and changing this state tax and last update I've heard that a lot of those things aren't going to be in it anymore. But again, until something's passed, we don't know for sure. Now, that doesn't stop the IRS of saying, okay, well, these are the current rules.
So we're going to still give you the updates for 2022 because there's still possibility that nothing passes. So they want to provide providing the guidance in place at the moment. Yes. Now, which is why we need to continue tuning in because as things change will update our that's right.
That's right. Yeah, because we're paying attention to it and making sure that we're handling it because if something does pass, we're going to deal with it as it happens. One of the things that I do think is highly likely to pass is the removal of the back door Roth IRA. When you make a contribution to a traditional IRA, as we've talked about, that's a tax deduction.
Now, we mentioned you do not get a tax deduction if you're covered by a retirement plan and if your income is over a certain dollar amount. So you can still make a contribution to the traditional IRA, but it is a non deductible contribution. If you make too much money, you also cannot contribute to a Roth IRA. They have income limits on a Roth IRA.
So you can make this this backdoor Roth IRA where you can make this non deductible contribution to a traditional IRA and immediately convert it to a Roth IRA. And it's a non taxable event because you made this non deductible contribution. So you didn't get a tax benefit for it. You immediately take it out, which is a taxable event.
But again, it's just return of your initial deposit, which is non taxable, the positive to the Roth IRA. That's completely allowed under current tax law. And if you're ever thinking about doing that for 2021, you should talk to somebody tax professional because you want to make sure you don't have any other existing traditional IRAs because that kind of throws a wrench into it. With all that being said, they're talking about eliminating the ability for people to do that because it really doesn't generate any revenue for the government.
So they have no reason to allow it. But then too, if you think about who actually utilizes it and has access to it is for individuals who are higher income earners. And a lot of these tax proposals have been kind of focused on the higher income people and eliminating some of the tax benefits or tax breaks that they may have access to. And so I do believe that that is something that'll probably make its way into a bill.
So if you have not done that for 2021, you should evaluate your ability to do that for 2021 and consider if it makes sense for you. Because if you could do it now, it's still allowed. If they changed the law with the passing of a bill and eliminate it in 2022, you may not have access to it. The other thing that the IRS also changed was or included in their inflation update for 2022 was the increase in the 401k contribution.
So maximum contribution limits that an employee could put into their 401k was 19,500. That was increased to 20,500 for 2022. So a little bump there. As we mentioned earlier, those catch up contributions, those are $1000 for traditional IRAs, 6,500 for those that are over age 50.
Those did not change. Catch up contributions are still 6,500 in 2022 for the 401ks. Yep, for the 401ks. So, you know, those are the major ones.
There's a lot of little nuances they provided guidance on. And I think we can link to the publication that the IRS put out in the show notes. And of course, individuals can reach out to us for any individual or more specific questions they might have on some little nuances. And our planning team will share with everybody what's pertinent to their specific situation.
But I thought it was interesting to kind of see these inflation adjustments that aren't necessarily consistent across the board. You know, we've got so security going up 5.9%, Medicare 14.5%, and then the IRS kind of using a 3% inflation adjustment. Let me ask you a question. If I can here going back to a state taxes.
So, you mentioned that in 2022, the basic exclusion amount is going up to 12,000,000. And that's like per person, right? So a couple of people give 24 million. Okay.
And then there's also this annual gift exclusion of 16,000 for 2022. So, basic question here. So, if I give 16,000 to each of my kids, that 16,000 applies toward my 12 million lifetime. And then question two is the 16,000, is that taxable income to my child?
Great question. So the answer simple, no and no. It does not apply to the 12 million. Anything under 16,000 for 2022, it's 15,000 in 2021 does not apply.
Now if you give 20,000, now you have to track it towards that. And then the second part of your question, no on that is not taxable income because you can pass it a state tax-free. So if it's not taxable like that, it's not taxable while you're alive either. So they don't have to report it to anybody as long as it's under that limit.
Now, do you see many of your clients take advantage of this 16,000 given to their kids to a lot of your clients do that? We do. And the nice thing about it, it's per person. So Steve, you and your wife can each give 16,000.
Our kids would love that. To each of their spouses. Right. And each of the grandchildren, if you had great.
So it's like, actually to anybody, you can give money to anyone. That is true. So if you think about that, well, your daughter's married and you and Linda could each give each one of them 16,000. So 64,000, they might want to tune into this show today to pick you up on that, Steve.
Is that where the $64,000 question came from? They were thinking ahead 2022. They knew. They knew.
That's right. How did they know? All right. It's great.
Well, that's a good material here today. Any other items, either bill or math that you guys want to mention here that we haven't talked about yet today? Well, we talked in the past about the downfalls of supporting adult children too long and to a point where it could potentially compromise someone's own personal financial plan. So on the topic of these annual exclusions for gifts, it's always something good for a parent to have in their back pocket.
So they can throw that $16,000 number out and say, gosh, that's all we're allowed to give. I'm sorry, but that's just how it works. They might not fill them in on that $64,000. Some of them still use the old numbers, like 10 or 11.
Right. Right. Because it's highly likely they're not looking into it. They know what they were listening to our show.
All right. Matt, any final thought from you as we wrap? You know, there's a lot of kind of nuances when it comes to this data. And we like to share it.
I think it's interesting and how Congress thinks and the IRS thinks and how this all comes together and a little bit of the history of it. But the key to it, as we've mentioned, is to have a plan, thoughtful plan, and to work with a professional to understand how this makes sense for you. Because not every one strategy or one little thing is right for everybody. So making sure that you understand how this fits in your overall plan.
And not only on a single tax your basis, but how we can utilize this and project this out over many decades for you and your family. That's a great point, Matt. And a lot of the things we talked about today, as you mentioned, some will apply to an individual, some won't. But I think it's good to have somewhere folks can come to and just listen to kind of what's pending in the economic environment and have some idea of why.
I like the way you painted a little bit of history today as well, Matt, to give some ideas on how things have changed over time. Yes, we want to talk about what's in play today. But understanding what's happened in history might give us a little insight into what might be coming ahead. Great.
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