Ep 49: Why Line 10 Is My Very Favorite Line on the Tax Return with David McKnight

October 9, 2019
Line 10 on your tax return can be a great joy for you in retirement. Before the tax cuts of 2018, you may have known it as Line 43, and it simply means your taxable income. Taxable income is important to someone trying to achieve the Power of Zero paradigm because in a rising tax rate environment th...

Episode Transcript - Why Line 10 Is My Very Favorite Line on the Tax Return with David McKnight

A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
Hey there. David McKnight. Welcome to The Power of Zero show. Of course, as always, I'm grateful that you're with us this week for another episode. We're closing in on 50 episodes here which means we've been doing it for about a year. Every week, we come to you with a new episode that helps illuminate The Power of Zero paradigm for you and for your retirement outlook. I am the best-selling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. You may have also seen our movie, The Power of Zero: The Tax Train Is Coming. If you haven't seen it yet, you can see it pretty much anywhere movies are streamed online. If you are looking for a Power of Zero advisor, someone who can help shepherd you along the path to get to the 0% tax bracket, certainly reach out to us at, we're happy to help. If you're an advisor who's looking for help in navigating all of these concepts to take to your clients, then go to and opt in to our video series.
Today, I'm going to talk about what I believe is the most important line on the tax return. Now, on the surface of it, this doesn't seem like would be a very exciting topic but it actually is an exciting topic and we're going to get into Line 10 on the tax return and why this can be a source of great joy for you in your retirement. Before the Tax Cuts and Jobs Act of 2018, this was actually Line 43. If you knew me, if you were an advisor or a client that knew me very well, then we talked about Line 43 all the time. Before I would look at a client's situation, I always had to understand what Line 43 was on the tax return. It's no longer Line 43, it's now Line 10 on the updated tax return. Line 10 is what we call taxable income. Now, why is taxable income so important for someone who is looking to adopt The Power of Zero outlook, strategy, or worldview? You have to remember that in a rising tax rate environment, we believe that there's an ideal amount of money to have in your taxable and tax-deferred bucket, which means that if you have too much in either of those two buckets, then anything above and beyond the ideal balance needs to be repositioned to tax-free. Remember, the ideal balance in the taxable bucket is about six months worth of basic living expenses, the ideal balance in the tax-deferred bucket is low enough that required minimum distributions are equal to or less than your standard deduction in retirement but also low enough that it does not cause Social Security taxation. Anything above and beyond these ideal amounts should be systematically repositioned to tax-free.
Now this is an important thing because when we're shifting money particularly from tax-deferred to tax-free, this is going to be a taxable event. In order for us to understand the implications of that taxable event, i.e. how much tax you're really going to pay, we have to go back to that idea of the graduated cylinder, you should always be picturing in your mind the graduated cylinder. Your taxable income flows into it, your 1099 income flows into it, goes all the way down to the bottom, some of your money gets taxed at 10%, some at 12%, some at 22%, some at 24%, some at 32%, some at 35%, and some at 37%. Your Line 10 on your tax return tells you, based on all your other income before you make those conversions or shifts to LIRP, tells you what your tax liability is, tells you what your marginal tax bracket is. For example, let's say you had taxable income of $50,000, we would know that would put you squarely in the 12% tax bracket, and any shifts that you made from tax-deferred to tax-free would flow into your graduated cylinder. Some of that money would be taxed at 12% and then you would really need to know where the 12% tax bracket ends. The 12% tax bracket ends at $78,950 so then you would have to evaluate whether you wanted to make shifts above and beyond that amount.
Let's go back to that $50,000 Line 10 amount on the tax return, that means you could shift $28,950 before bumping up into the 22% tax bracket. You can start to understand why it's so important to understand what Line 10 is on your tax return that it really tells you how much money you can shift in a given year before bumping up into the next highest tax bracket. This will help you assess how much you should be shifting and what amount of heartburn you might experience should you shift into one of these upper tax brackets. I've long said this, if you're currently in a 10% or 12% tax brackets, certainly shift up to the top of the 12%, but if in the name of helping you avoid a doubling of tax rates over time, we took you from a 12% to a 22% tax bracket in the short term, we've almost doubled your tax bracket in the short term in an effort to help you avoid a doubling of tax rates over time, so that obviously doesn't help very much. The Line 10 on your tax return tells you what your taxable income is, it tells you how much you can shift from tax-deferred to tax-free without bumping up into the next highest tax bracket.
Let's talk about how we get to your taxable income, how do you arrive at your taxable income? There are a couple of steps—I don't want to bore you to tears here but this is important stuff—you start off with your gross income which is all of your income from all your different sources. From that gross income, you are allowed to subtract some additional deductions that are called above-the-line deductions. Now, these are deductions that will get you down to your adjusted gross income. Let me give you an idea of what some above-the-line deductions are. Any contributions that you make to your traditional tax-deferred retirement plans like your 401(k)s, 403(b)s, 457s, those are above-the-line deductions, any contributions you make to your HSAs are above-the-line deductions, if you're an educator, educator expenses, student loan interest, tuition fees, those are above-the-line deduction. That gets you down to your adjusted gross income. Once you're at your adjusted gross income, to get to your taxable income, you have to decide which one is greater, either your standard deduction which if you retire today is $24,400, it's a little bit higher if you're above 65 as a married couple, or you have to take your itemized deductions, that's going to be your home interest, other types of deductions that you can deduct, charitable contributions, those types of things. You want to take your itemized deductions in one hand and then you take your standard deduction in the other, and whichever one is greater, that's the one that you want to use, that's the one that will be deducted from your adjusted gross income to get you down to your taxable income. Once you know your taxable income, then you can understand the implications of any shifting that you do from tax-deferred to tax-free. It's eminently important that you look at your tax return and figure out what your taxable income is because that's going to tell you what your marginal tax bracket is, and the marginal tax bracket is the rate at which you will pay tax should you engage in any of the shifting strategies that we talked about.
By the way, the marginal tax bracket is also the tax rate at which you save taxes should you do something that generates tax savings. That might be a contribution to a 401(k), it might be taking out a mortgage, you experience mortgage tax savings at your highest marginal tax bracket. This Line 10 on your tax return tells you the tax rate at which you'll pay taxes should you do some shifting, it will tell you the tax rate which you can save taxes should you experience additional tax deductions. Of course, most of the people that we meet with are in the 22% tax bracket so they aren't violently opposed to doing shifting to get them to the top of the 22% tax bracket, the top of the 22% tax bracket is $168,400.
Now, I've often quizzed people who don't know me very well, I ask the question, “What is my second-favorite tax bracket?” they all know that my favorite tax bracket is the 0% tax bracket, which, mind you, is not really a tax bracket but if you are not paying any taxes, it's not too far-fetched to say that you're in the 0% tax bracket, so I tell people my favorite tax bracket is the 0% tax bracket. My second-favorite tax bracket is the 24% tax bracket. Here's why, if you're on the 22% tax bracket, let's say you have Line 10 on your tax return is $150,000, that means that you can shift $18,400 before you bump up into the 24% tax bracket, guess what, the 24% tax bracket is only 2% higher than the 22% tax bracket, yet it gives you almost $150,000 more of shifting space before you bump up into the thirty 32% tax bracket. For example, the 24% tax bracket ends at $321,450. If you have $150,000 of taxable income, in other words, Line 10 on your tax return is $150,000, you could shift another $18,400 before you get to the top of the 22%, but for only 2% more, you could shift another roughly $150,000 to get to the top of the 24% tax bracket.
Most people, when I make them aware of this, say, “Absolutely, when you run the numbers, include an annual shift over the course of the next seven years that will allow me to get to the top of the 24% tax bracket,” because let's face it, folks, if you have $1 million in your IRA, for example, and it's growing at 6% and your ideal balance in your tax-deferred bucket is, say, $300,000, you're going to need to shift about $125,000 per year over the course of the next seven years to get that tax-deferred balance spent down to the right amount or shifted down to the right amount as it were. It's very, very important to understand that some of your money in that scenario would be taxed at 22%, some would be taxed at 24%. Your effective rate on that, because most of it is being taxed at 24%, would probably be like 23.5% or 23.75%, something like that, throw in another 6% for state and that's going to get you close to the 30% area.
Now, what you ultimately have to do is you have to ask yourself, “Is that tax rate that I'll be paying today higher or lower than what I would be paying down the road?” If it's higher than what you'd be paying down the road, you should probably consider postponing in these sort of Roth conversions until somewhere down the road. However, if you think it's lower, if you think that tax rates right now are on sale, then you should definitely shift to the top of that 24% tax bracket. I'm telling people that 10 years from now when a lot of these experts in our movie predicted that tax rates will either double or rise dramatically, I believe strongly that in 2028, 2030, that you will look back on 2019 tax rates and say that those tax rates were good deals of historic proportion. Now, you don't have to take my word for it, you can do all of the research on your own, you can get a feel for the lay of the fiscal landscape of our country, and if you agree like I do—and most Power of Zero advisors do—that tax rates today are historically low and that 10 years from now, we will look back and say, “Those tax rates were great deals, deals of the century as it were,” then I think that it's probably a good idea for you to, number one, go to your tax return, if your income this year is not going to be too much different than your income last year, then the Line 10 on your tax return will be a useful barometer, if you will, for what the implications of any shifting from tax-deferred to tax-free will be.
Check out your Line 10 on your tax return, figure out what marginal tax bracket that puts you in, and then ask yourself how much room you have in that tax bracket to be able to shift before you get to the next level. If you are currently in a 10% or 12% tax bracket, you'll probably only feel comfortable shifting to the top of the 12%. If you're currently in a 22% or 24%, you will likely only feel comfortable shifting up to the top of the 24%. If you are currently in a 22% and you're planning on having a pension in retirement, I can almost guarantee that tax rates today are as low as you'll ever see in your lifetime, because remember, when you have a pension that causes Social Security taxation so your pension and your Social Security taxation will fill up your first two brackets in retirement your, 10% and your 12% tax bracket, then any money you take out of your IRAs or 401(k)s will be piled right on top of that almost certainly be taxed at the 22% tax bracket or the future equivalent of the 22%. We know that right now, the future equivalent after 2026 is going to be 25%, the 24% will become the 28%, so we have to recognize what the implications of waiting are as well. All of these important decisions can be informed by simply understanding what Line 10 on your tax return is. Sometimes, I look at people's Line 10 and I say, “Mr. and Mrs. Jones, not a year should go by where you’re not at least maxing out your 12% tax bracket,” it creates a real sense of urgency when people realize that if they don't max out their 12% over the course of the next 7 years, then that 12% becomes a 15%. We're looking to create as many opportunities where you have nothing to lose as possible. We want as many of those opportunities where you know that if you make that shift today, then you're not going to be losing now.
That's the show for today, not super long but I wanted to really, really instill the importance of Line 10 on your tax return, formerly, Line 43, now, Line 10, it tells you what your taxable income is, it tells you what your marginal tax bracket is. Again, if you want bulk books, you can go to If you need help navigating the path to 0% tax bracket, go to If you're an advisor and you want to learn how to become a certified Power of Zero advisor, go to, opt in to our video series, and of course, as always, please subscribe so you can get each new episode in your email inbox each and every week. Thanks so much and we will talk to you next week.

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