Ep 56: When Bumping from a 12% to a 22% Tax Bracket Makes Sense with David McKnight

November 27, 2019
David is generally very reluctant to recommend something that would cause someone to bump from a 12% tax bracket into a 22% tax bracket. We’re trying to avoid the tax apocalypse that’s coming down the road, and that means thinking about the future. There are some circumstances where it makes sense t...

Episode Transcript - When Bumping from a 12% to a 22% Tax Bracket Makes Sense 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.
Hi there. David McKnight. Welcome to The Power of Zero show. I’m grateful to have you for another episode. Today, we're going to be talking about in your asset-shifting strategy, in your attempt to get out or near the 0% tax bracket, in what circumstances might it make sense for you to bump from a 12% tax bracket all the way up to a 22% tax bracket? Before we get to that, as you know, I'm the number one bestselling 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 which can be streamed pretty much wherever you stream movies. If you are a financial advisor and are looking to transition your practice to a Power of Zero type practice, you can go to and opt-in to our video series. If you are looking yourself to get to the 0% tax bracket, mosey on over to and we'd be happy to help you answer any questions that you have and help you navigate all of the pitfalls that stand between you and the 0% tax bracket.
Let's jump into today's topic without any further ado. If you've been listening to the show long enough, you know that I am very, very reluctant to give any recommendations which cause someone to bump from a 12% tax bracket all the way up into 22% tax bracket and here's the reason, as you know, we're trying to help you avoid paying double taxes over time because we feel like David Walker is right, former Comptroller General of the federal government, the only way we may be able to keep our country solvent is by doubling taxes overtime to pay for Social Security, Medicare, and Medicaid. We're trying to help you avoid this tax apocalypse that's waiting for us down the road. One of the ways of doing that is to systematically reposition your tax-deferred assets to tax-free, but you also have to remember that we're very cognizant of the tax bracket that you're currently in, we don't want to, in an effort to help you avoid a doubling of tax rates over time, have you double your tax bracket in the short term and one of the problems historically that we've seen is if you're currently in a 12% tax bracket and we cause you to bump up into a 22% tax bracket in an effort to get you to the 0% tax bracket, we have, in fact, almost doubled your tax rate in the short term in an effort to achieve that goal. Historically, I've been very, very loathe to make a recommendation like that but I also would like to qualify that and tell you that there are some circumstances in which I think we could make the case that if you're currently in a 12% tax bracket, it does make sense to bump up into a 22%.
Now let me lay a scenario out for you, and hopefully, you can follow along. Remember, we've got our three buckets, taxable, tax-deferred, tax-free, let's say we've got a pair of 65-year-olds, they've got $200,000 sitting in a savings account in their taxable bucket, they've got $700,000 in an IRA in their tax-deferred bucket but they've also got a $60,000 pension and they're receiving $30,000 from Social Security. The first thing we gotta do is we got to look at what their taxable income is. To figure out what their taxable income is, we start off with their gross income and their gross income is going to be the $60,000 pension and we're getting pretty close to where—given the fact that they've got $60,000 of provisional income in that pension and one half of their Social Security also counts as provisional income—we've got almost $75,000 of provisional income, that's going to get these folks pretty close to the point where 85% of their Social Security becomes taxable to them. We're going to say that 85% of that Social Security, which is about $25,500, is going to end up being taxable income. If you take their pension which is $60,000, the 85% taxable portion of their Social Security which is $25,500, that adds up to $85,500. Now, that gives us their gross income. From that, we have to now subtract the greater of their itemized deductions or their standard deduction, let's assume they don't have any itemized deductions left so they're going to deduct their standard deduction, which for someone who is 65 or older, you get the standard $24,400 deduction if you're married, but if you're over age 65, remember, you also get $1,300 each, or if you're legally blind, you get $1,300 per person. That's going to push their standard deduction up to $27,000. Now if you subtract all that out, that puts us at $58,500 of taxable income, in other words, their Line 10 on their tax return would read $58,500, and a few have studied the tax thresholds on these tax brackets like I have, you would immediately be able to identify that puts them in the 12% tax bracket.
Now the 12% tax bracket is a good deal of historic proportions so I think that ten years from now, we'll look back and say, “Twelve percent, man, that was the deal of the century. There will never be anything like it ever again.” But the other thing that we also have to acknowledge is that they have $700,000 in their tax-deferred bucket and there is only $20,000 left before they hit the top of the 12% tax bracket, in other words, we could shift $20,000 of that $700,000 from tax-deferred to tax-free, keep them in the 12% tax bracket, but that begs the question, “Are we really solving anything? Is this an impactful recommendation or are we merely rearranging deck chairs on the Titanic?” After all, if that $700,000 for this pair of 65-year-olds is growing at 6% or 7% per year, then we're talking almost $50,000 of growth on that IRA between now and age 70.5 when they're going to be forced to take that money out. How big will that IRA be by the time they're forced to take the money out?
That leads me to my first point. My first point is there may be a scenario within which it makes sense to bump them up into the 22% tax bracket and that's projecting outward to age 70.5 and saying, “What is likely to be their required minimum distribution?” I think that we can make the case that if their IRA is worth $1 million or more by the time they reach age 70.5, then their RMD is already going to be pushing them up into the 22% tax bracket so we have to project outwards, project forward in time and saying, “How big will their RMD be by the time they're 70.5?” By the way, by the time these folks reach 70.5, they're going to be very, very close to the point in time when that 22% tax bracket is going to be reverting back to the 25% tax bracket, in which case, we might be able to say, “Hey, look, that 22% was a good deal even if we had to bump up into it from the 12% tax bracket.”
The first scenario that we have to take an accounting of is “What will their RMD be forcing them to do down the road; will it push them into a higher tax bracket?” In this case, I think that we could definitely make that case. The second thing that we have to recognize is that there are circumstances in which somebody could go from a 12% tax bracket to a 22% tax bracket overnight, and here's what I'm talking about, if you have a couple of 65-year-olds and one of them dies, starting the very next year, they will allow you to stay in the married filing jointly tax bracket until the end of that year, the year in which the spouse dies, but guess what, starting the very next year, you are now in a single filer tax bracket and instead of having the 22% tax brackets start at $78,000 and change, it’s going to start at $39,000 and change, guess what, you are enjoying that 12% tax bracket right up until the moment when your spouse died and then the following year, you find yourself in a 22% tax bracket, which of course, come 2026 is going to be a 25% tax bracket. You have to always remember, you hear about the marriage penalty over time, I think, frankly, it's a penalty be single because your tax bracket, for all intents and purposes, gets chopped in half, you could only fit half as much money into that 12% tax bracket, $39,000 as opposed to $78,000 and change, so you have to recognize that you're not necessarily going to enjoy that 22% or 25% tax bracket in perpetuity, it gets taken away from you. Your tax bracket basically doubles in the year following the moment in which your spouse dies so you have to also recognize that.
The third scenario that you have to be mindful of when it comes to contemplating the wisdom of bumping up into a 22% tax bracket from a 12% tax bracket is the upcoming SECURE Act. Now remember, the SECURE Act is not a law yet but it is getting overwhelming bipartisan support. Basically, the SECURE Act is going to do a couple of things, number one, it looks like they're finally agreeing on an age for the new RMD, it's most likely going to be 72 so they're most likely going to push that age for RMDs back to 72—that's not a big deal in the big scheme of things—but here is the big deal, starting next year, they could force a non-spouse beneficiary, that means probably your children, if they inherit your IRA or 401(k), they will then force you to spend down that IRA over the course of 10 years. Let me put that into perspective for you, let's say you got $1 million IRA, it's growing at 6.5% per year. If you had to spend that down over ten years, that means you would have to realize as taxable income about $125,000 every year for ten years. Now, if you're 65 right now, your kids are not going to be inheriting your money now, they're probably going to be inheriting your money 10 or 20 years from now at a period in their lives when they're most likely at the apex of their earning years, at a period in time when tax rates are likely to be much higher than they are today, at a period in their lives when they can least afford to pay for all this extra tax. But remember, it's going to land right on top of all their other income. If you say, “Hey, look, I'm afraid of the 22% tax bracket, therefore, I'm only going to be shifting, in this scenario, $20,000 per year into the tax-free bucket because I want to keep in that 12% tax bracket,” guess what, your children could end up paying tax on this money potentially at the 32%, 35%, 37% tax bracket or the future equivalent thereof and end up spending triple the amount of tax whereas you could have paid taxes on that at only 22% and allow them to receive all that money tax-free.
In summary, I think there are three circumstances where you might want to consider bumping up from that 12% tax bracket to the 22% tax bracket. First one is if your RMDs are going to be so big eventually that they will force you into the 22% tax bracket. Secondly, if one of you ends up dying, one of the partners in the marriage ends up dying prematurely, you could spend a fair amount of time in the single-filer tax cylinder which accelerates from a 12% to 22% twice as quickly as it does when you're married. Finally, the third scenario is if the SECURE Act gets legislated into law, which most experts believe is going to happen on January 1st, they think they're going to sneak it into a spending bill at the end of the year so that as of January 1st, it becomes law, your children could end up paying a much, much higher tax bracket when they inherit your money and are forced to spend it down over 10 years, much higher than 22%. They could look back and say, “Hey, mom and dad, why didn't you pay taxes on that money at 22% so that we can then inherit it tax-free?”
That's the show for today. There are indeed circumstances in which you would want to bump up from 12% to 22%, not every time certainly, but there are circumstances in which we would most certainly recommend taking a look at it.
Once again, I am the bestselling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. You can get all of those books in bulk at You can see the movie anywhere that you stream movies, you can catch that. If you want to gift a viewing to someone, you can go to Once again, if you are looking for someone to help you get to the 0% tax bracket, go to If you are a financial advisor looking to transition your practice to a Power of Zero type of practice, then go to, opt-in to our video series. I would recommend, if you can, to follow me on Twitter, I would love to have you, we are updating all things tax, national debt, unfunded obligations, and strategies on how to get to the 0% tax bracket. If you're not following me, please do, and again, if you haven't had a chance to subscribe, subscribe to our podcast. Also, if you have a chance to put a review for our podcast or any of our books, we would be absolutely honored if you did so. Other than that, thank you for being with us and we will look forward to chatting with you next week.

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