We look forward to the Van Mueller newsletter every month. It's chock-full of sound bites, sales tips, and eye-opening statistics. Here are our favorite parts of the December 2022 edition. We're sharing the full introduction, and 2 of the 7 monthly sales ideas. If you like what you read, we encourage you to click here and become a subscriber.
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December 2022 – 7 Ideas and Views Newsletter by Van Mueller
Do you realize how important you will be to the well being of all the people you call on over the next one year, five years, ten years, etc.? The next ten years will be the most amazing, interesting, and yes challenging years in the history of mankind. The people in our industry will have a vital and leadership role in the positive or negative financial and retirement success of the American and Canadian people.
Do you understand and have you come to the realization that the establishments and institutions we depend on, will be hard pressed to keep the promises they have made? In fact, in many cases it has become mathematically impossible.
Shouldn’t we then work on every methodology available to us in our industry to help inspire our customers to realize that because we live in the United States and Canada that they can still achieve financial and retirement success on their own. This can be accomplished even if our establishments and institutions fail us.
Our customers can still achieve financial and retirement success on their own.
These are not throw away sentences to start my newsletter. Isn’t it imperative that our customers reason out for themselves that they must have a strategy under any circumstance? Don’t assume they know this information. Many people in our two countries believe that the government will take care of them. In fact, isn’t it a majority of people? How do we get them to understand that it has now become mathematically impossible? Wouldn’t it be by having a conversation about these issues using your questions to inspire our customers to discover that if they don’t take action, they will lose and if they do take action, they will win. Shouldn’t we help our customers arrive at this important determination? Will they be more inspired by us telling them what to do or by us asking them what would be the most beneficial outcome for them, their family, and their business?
I believe this is the most exciting time ever to do what we do. I also believe that we are more valuable to our customer than we’ve ever been. What a great opportunity to have success while being significant. It is absolutely the greatest time ever to be an insurance and financial professional!!
I am about to share career changing information with all of you. You should read and practice what I am about to share with you, over and over until it becomes a part of you. It must become natural. It must become instinctive. I have talked about this for years; however, I did not pay well enough attention to understand that we as an industry were not explaining it well or we were not helping our agents and financial professionals to learn this vital information. Once you instinctively can discuss and ask questions of everyone about this information your practice will immediately increase for the better.
Once you instinctively can discuss and ask questions of everyone about this information your practice will immediately increase for the better.
Why am I sharing this with you? I have been speaking in person a great number of times lately and I have been stunned to discover how few people in our industry understand this vital information. If we don’t understand this information, it is possible that our customers don’t realize the damage they are doing to their financial and retirement success. It also doesn’t matter if it is intentional or unintentional. Here’s the worst part: Our customers are unaware of the poor choices they are making because they are being informed in ways that are beneficial to the sellers of these non-beneficial products rather than being given complete information.
Contribute to a 401(k) or IRA without determining if you are receiving a worthwhile up front tax deduction. Buy term and invest the difference. Use tax deferral to reduce income taxes now. Life insurance is a lousy investment. All of these are ridiculously inaccurate statements. Yet, because media advertising and government tell you thousands and thousands of times that they are truth, you begin to believe them. Ask your customers if they don’t believe government has their back in other scenarios, why would they believe these declarations? Who do the practices ultimately benefit? Ask them.
Now I want to try to simplify what many in our industry consider complexity. Use these simplification methods and you will jet propel your ability to help people dramatically.
Use these simplification methods and you will jet propel your ability to help people dramatically.
Let’s take this step by step! What is this mysterious information that we should all have a basic understanding of in order to provide life insurance and annuities for their BEST purpose? It’s a basic understanding of income taxes. Most of our agents and financial professionals and literally all of our customers have little or no understanding of how income taxes work. How do I know this? Think about this; sixty one percent of Americans pay no federal income tax and yet they contribute to tax deductible 401(k)s, IRAs, 403(b)s and 457 plans. They get no deduction on the front side and build a pile of money that could be taxed at 20 percent, 30 percent or even 40 percent on the back side. That is not a good understanding of tax law.
Many people who can take a deduction on the front side do not understand the difference between marginal tax rates and effective tax rates. According to the most recent Wage Statistics information provided by Social Security, every year, 92 percent of Americans make less than $120,000. That means in 2023 their marginal tax rate would be 12 percent. Their effective tax rate would be 8.6 percent. That means if they contribute $10,000 to their 401(k), they are only realizing an $860 tax deduction initially. They, their original investment plus all the growth ends up being taxed at 20, 30, or even 40 percent. It could even be more if the government keeps leaning to provide more and more benefits while not exercising fiscal or monetary restraint. Ask your customer these questions. Is it beneficial for you, your family and your business to take an effective tax deduction of 8.6 percent now so you and your family can pay 20 or 30 or even 40 percent on all your contributions and their growth when you take the money out? Or would it be more beneficial to pay your income taxes now at an effective tax rate of 8.6 percent and invest your money in strategies that would never allow income taxation on the contributions or the growth for the rest of your life?
Most agents really don’t even know how to have a discussion like that. I am going to share how the basic information abut taxes we will learn in the rest of this newsletter will change your practice forever, for the better.
I am going to share how the basic information abut taxes we will learn in the rest of this newsletter will change your practice forever, for the better.
To make this simple, we must start with the Internal Revenue Service website. It is irs.gov. When you get to the site there will be a category across the top entitled “Forms & Instructions.” Then scroll down to the box that says Form 1040. Under related, it will have a hyperlink entitled “Instructions for Form 1040.” Currently, if you click on that hyperlink, it will take you to the instructions to file taxes for 2021. There are 114 pages. I would recommend that you print out the entire 114 pages and read them.
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf (For 2021 - We will provide the updated link in the February newsletter for 2022.)
I think you will be surprised by what you learn. There are really only 4 pages (31, 33, 109 and 110) that you must learn in order to build the foundation that would support a better understanding of income taxes and tax deferral.
Page 31: This page is a worksheet used to determine how much of your Social Security, if any will be income taxable. After, you have completed it a few times I believe you can do the calculation in your head.
Page 33: This page is the standard deduction worksheet. It shows you for both over and under age 65 taxpayers how much taxable income you can make before you pay one cent in tax.
Page 109: This provides two pie charts. One for how much and what kind of taxes there are. Notice we have to borrow 48 percent of the money needed to run our government. This information comes directly from the government. The second pie chart shows what we spend the money on. The information is self-explanatory.
Page 110: These are the tax rate schedules. The top two charts for singles and married couples filing jointly are the ones you will use the most.
This is OLD INFORMATION. We are almost done with 2022 and about to start 2023 and that current information for 2022 will not be made available by the Internal Revenue Service until mid to late January, 2023. At that time in the February newsletter, I will tell you that the new information is available and what those four page numbers will be.
We are about to begin 2023 and the standard deduction and tax rate schedules will increase dramatically because of inflation. I will share those numbers with you shortly. You will need them to have the most productive 2023 you could have. Once you have this basic understanding you will see how valuable you are to your customers.
One final thing before we discuss the next tax information. Please print out the entire 1040 instructions and then bookmark the four pages. Now, your customers will realize that the information you are asking questions about comes right from the Internal Revenue Service’s 1040 instructions. You didn’t edit the information.
Your customers will realize that the information you are asking questions about comes right from the Internal Revenue Service’s 1040 instructions. You didn’t edit the information.
The important information for customers revolves around several very easy concepts. What are the standard deductions? What are the marginal tax rates? What are the effective tax rates? And can tax deferral be beneficial or harmful?
Let’s begin with standard deductions. The standard deduction for single people under age 65 is $13,850. The standard deduction for single people over age 65 is $15,700. The standard deduction for married couples filing a joint return under age 65 is $27,700. The standard deduction for married couples filing a joint return where one is under age 65 and one is over age 65 is $29,200. Finally, the standard deduction for a married couple filing a joint return where both are over age 65 is $30,700 in 2023. Can you imagine they can have $30,700 of fully taxable income and then the standard deduction will eliminate the taxes on that amount.
So, if this couple has $30,000 of non-tax Roth income or $30,000 of non-taxable life insurance income, in 2023. They can earn another 30,7000 of fully taxable income, if they are over age 65, for a total of $60,700 of gross income and not pay one cent of income tax. Understanding that the United States has a progressive income tax law is vital to helping customers dramatically reduce their income tax liability over their lifetime. Progressive means that an initial amount of taxable income has no tax liability. Then a certain amount is taxed at 10 percent. The next amount at 12 percent. The next amount at 22 percent and the next amount at 24 percent. The 24 percent bracket takes the taxable income up to almost $400,000 for a married couple. Why do I stop there when we have three more brackets? Because if we ever went to a flat tax, I do not want any of my customers telling me they had to pay more tax than they had to: I will explain later.
We must understand a couple more concepts and we will have the foundation we need to understand why planning is so important.
We must understand a couple more concepts and we will have the foundation we need to understand why planning is so important.
Marginal Tax Rates
Marginal tax rates are the rates at which your next incremental dollar in taxable earnings is taxed. Marginal tax rates are used when a tax system uses brackets to define different levels of income. We have seven brackets in the United States. 10, 12, 22, 24, 32, 35 and 37 percent. These are all marginal tax rates.
Effective Tax Rates
This is a taxpayer’s average tax rate, or what share of their total annual income they’ll need to pay in taxes
I have created some rules to help me remember both the marginal and effective tax rate for almost everyone I will ever come across. Before I finally share that information, we must know the 2023 Tax Rate Schedules for people who are single and people who are married and filing joint returns. I will share all seven brackets. I will only share in this newsletter the four brackets we use the most.
Single Brackets for 2023
10 Percent: $11,000
12 Percent: $44,725
22 Percent: $95,375
24 Percent: $182,100
Married Filing Joint Returns for 2023
10 Percent $22,000
12 Percent $89,450
22 Percent $190,750
24 Percent $364,200
This is the most important part!!!
Using the standard deduction and the various tax brackets I have created some easy to remember rules to remember marginal and effective income tax rates. I am only going to use over age 65 singles and over age 65 married couples filing joint returns for my examples. I don’t want to overwhelm you; however, I am hoping that this information will help you to understand all the strategies we can employ to help our customers not be harmed by a terrible misunderstanding about tax deferral. Here are some examples of 2023.
Over Age 65 and Single
1. $26,700 Rule of 27-10. Effective Tax Rate 4.1%
This is derived by adding the standard deduction for a single over age 65 of $15,700 and the entire 10 percent bracket of $11,000. They add up to $26,700. Rounded to the nearest thousand is 27. The marginal tax rate is 10 percent. Since there is NO tax on the standard deduction of $15,700 and 10 percent tax on the 10 percent bracket of $11,000, the tax is ONLY $1,100. If you divide $1,100 of tax by $26,700 of income the effective tax rate is 4.1 percent.
2. $60,425 Rule of 60-12 Effective Tax Rate 8.4%
This is calculated by adding the standard deduction of $15,700 and the entire 10 percent bracket of $11,000 and the entire 12 percent bracket of $33,725. They add up to $60,425. Rounded to the nearest thousand is 60. The marginal tax rate is 12 percent. Since there is NO tax on the standard deduction and 10 percent tax on the next $11,000 of income and 12 percent tax on the next $33,725 of income, the tax is $1,100 plus $4,047 or $5,147. If you divide $5,147 of tax by $60,425 of income the effective tax rate is 8.4 percent.
3. $111,075 Rule of 111-22 Effective Tax Rate 14.69%
This is calculated by adding the standard deduction of $15,700 and the entire 10 percent bracket of $11,000 and the entire 12 percent bracket of $33,725 and the entire 22 percent bracket of $50,650. They add up to $111,075. Rounded to the nearest thousand is 111,000. The marginal tax rate is 22 percent. Again, NO TAX on the standard deduction and 10 percent tax on the next $11,000 of income and 12 percent tax on the next $33,725 of income and 22 percent tax on the next $50,650 of income. The tax added together is $16, 290. If you divided $16,290 by $111,075 the effective tax rate is 14.6 percent.
4. Rule of 198-24 Effective Tax Rate 19.8%
This is calculated by adding the standard deduction of $15,700 and the entire 10 percent bracket of $11,000 and the entire 12 percent bracket of $33,725 and the entire 22 percent bracket of $50,650 and the entire 24 percent bracket of $86,725. They add up to $197,800. Rounded to the nearest thousand is 198,000. The marginal tax rate is 24 percent. Again, NO TAX on the standard deduction and 10 percent tax on the next $11,000 of income and 12 percent tax on the next $33,725 of income and 22 percent tax on the next $50,650 of income and finally 24 percent tax on the next $86,725 of income. The tax added together is $37,104. If you divide $37,104 by $197,800 the effective tax rate is 18.8%.
I’m not going to repeat these calculations for a married couple over age 65 filing a joint return. The math is the same except for the fact that a married couple over the age of 65 has a higher standard deduction than a single person over the age of 65. I believe you should understand how to calculate and understand this information using the charts I am now going to share with you. If you want me to review this again next month, please let me know.
Standard Deduction
| Under Age 65 | One Over 65 & One Under 65 |
Over Age 65 |
|---|---|---|
| Single | Married | Married | Single | Married |
| $13,850 | $27,700 | $29,200 | $15,700 | $30,700 |
TAX RULES
Under Age 65 - Single
$24,850 Rule of 25-10 Effective Tax Rate 4.4%
$58,575 Rule of 59-12 Effective Tax Rate 8.8%
$109,225 Rule of 109-22 Effective Tax Rate 17.1%
$195,900 Rule of 196-24 Effective Tax Rate 18.9%
Over Age 65 - Single
$26,700 Rule of 27-10 Effective Tax Rate 4.1%
$60,425 Rule of 60-12 Effective Tax Rate 8.4%
$111,075 Rule of 111-22 Effective Tax Rate 14.6%
$197,800 Rule of 198-24 Effective Tax Rate 18.8%
Under Age 65, Married Filing Joint Return
$49,700 Rule of 50-10 Effective Tax Rate 4.4%
$117,150 Rule of 117-12 Effective Tax Rate 8.8%
$218,450 Rule of 218-22 Effective Tax Rate 14.9%
$391,900 Rule of 392-24 Effective Tax Rate 18.9%
Over Age 65, Married Filing Joint Return
$52,700 Rule of 53-10 Effective Tax Rate 4.2%
$120,150 Rule of 120-12 Effective Tax Rate 8.6%
$221,450 Rule of 221-22 Effective Tax Rate 14.7%
$394,900 Rule of 395-24 Effective Tax Rate 18.8%
If you have paid careful attention couples that make less than $120,000 and singles that make less than $58,575 always have a single digit effective tax rate of 8.8 percent or lower.
Become creative. A single person with $50,000 of income in 2023 could take $8,575 out of an IRA, 401(k), 403(b), 457 plan or gains from a tax deferred annuity and only pay $755 in taxes. If they did that for 15 years, they could eliminate the income tax on $128,625 and it would only cost them $11,325 while they were alive. If they wait until they die, their family could pay $25,000 or $39,000. Also, if they move that $8,575 per year from their left pocket into their right pocket, they could invest in a cash value life insurance policy which would turn the $128,625 from forever taxed to never taxed money and the death benefit which is more than the cash value is a leveraged benefit. When they die, the death benefit would reimburse the family the $11,325 they paid while alive. That Means Our Customer Got All Of The Money Out Of These Fully Taxable Products Without Paying One Cent Of The Tax Out Of Their Own Pocket. WOW!!!
That means our customer got all of the money out of these fully taxable products without paying one cent of the tax out of their own pocket. WOW!!!
Here's an example of a married couple over the age of 65 filing a joint return. In 2023, if their taxable income is $80,000, under the rule of 120-12, they could take out another $40,000 of fully taxable money and still be in the 8.6 percent effective tax rate. That means it would cost them $3,440 per year to remove $40,000 of fully taxable money. They could remove $400,000 from an IRA or 401(k) and it would only cost them $34,400 over 10 years. If you took the money from their left pocket and put it in their right pocket, (a 10 pay cash value life insurance policy) you would turn $400,000 of forever taxed money into $400,000 of never taxed money. The death benefit paid above the cash value would reimburse the family the $34,400 they paid while alive. Again, this allows the customer to remove the entire $400,000 of fully taxable money without paying one cent of income tax out of their own pockets. Amazing!
If you are creative there are hundreds and hundreds of examples how to use these rules to help customers understand the danger of tax deferral and the benefit of paying your income taxes now. Income taxes are probably at the lowest rate they will ever be for the rest of our lives.
Have some fun with this information. Use it as a conversation starter. Are you taking advantage of the Rule of 120-12? They will ask what is the Rule? You’ve never heard of the Rule of 120-12? I thought you would be people who would be taking advantage of such an important tax rule. I don’t know what it is. It shows you how to convert marginal tax rates to effective tax rates so you can stay in control of the taxes on pensions, IRAs, 401(k)s, etc. You can even use their name and call it the Jones Rule of 120-12.
Have some fun with this information. Use it as a conversation starter. Are you taking advantage of the Rule of 120- 12?
One final thing: Ninety two percent of Americans make less than $120,000. So, you will probably use the Rule of 53-10 and the Rule of 120-12 the most. Start with those. You will be amazed at the wonderful discussions you will initiate just using these rules. Also, this is basically all you need to have a foundational understanding of income taxes. Is there a lot more? Of course. Will you want to add to your knowledge in the future? Possibly. Will the information we just shared help you to have amazing discussions about taxes and tax deferral? Yes! Practice this information and make 2023 your best year ever.
Idea #1: Taking Social Security at Age 70 Provides $200,000 in Additional Benefits
According to a new study by the National Bureau of Economic Research, it would be beneficial to over 90 percent of Americans to defer until age 70. You don’t have to live a long life to benefit. Most will see positive outcomes by deferring until age 70 if they only live to age 85. Deferring will also reduce how much of your assets you need to use to provide retirement income. If inflation continues, you will also see larger increases in your Social Security benefit. Please read these articles.
Title: Delaying Social Security Has Rarely Been This Profitable
https://www.fa-mag.com/ (Financial Advisor, October 20, 2022)
https://www.fa-mag.com/news/delaying-your-social-security-has-rarely-been-this-profitable-70234.html
Title: Waiting to Claim Social Security Can Boost Income by 10.4%: Study
https://www.thinkadvisor.com/ (Think Advisor, November 21, 2022)
https://www.thinkadvisor.com/2022/11/21/waiting-to-claim-social-security-can-boost-income-by-10-4-study/#:~:text=A%20new%20analysis%20suggests%20that,typical%20worker's%20lifetime%20spending%20capacity
Idea #4: Using HSA's to Build Wealth
An HSA (Health Savings Account) is a triple tax-free plan. You get a deduction going into the HSA. There are no income limits. You receive tax free growth, and you can pull the money out of the HSA income tax free. If done correctly, you should never have a taxable distribution from an HSA.
If you would have used an HSA to its maximum ability starting in 2004 you would have almost $500,000 in this triple tax-free account. Your customers should know about this.
Title: A Few Simple Tricks Turn Humble HSAs Into Wealth Builders
https://www.fa-mag.com/ (Financial Advisor, November 10, 2022)
https://www.fa-mag.com/news/a-few-simple-tricks-can-turn-hsas-into-wealth-builders-70550.html#:~:text=The%20trick%20to%20using%20an,generated%20additional%20wealth%2C%20Stahl%20said
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