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  • Kevin McCollester

Death and taxes

In a letter to Jean-Baptiste Leroy, Benjamin Franklin quipped that "in this world nothing can be said to be certain, except death and taxes." While this may be true (subject for another post), we oftentimes act and plan as if there is nothing we can do about it, particularly taxes.

Let's look at a simple example that highlights the devastating effect of both death and taxes.

Frank and Edith are married and over 65. They live modestly and receive retirement income from both Social Security and IRA distributions. They file taxes "married filing jointly".

Let's assume the following:

Frank receives SS income of $24,000. Edith also receives SS income, but at a lower benefit of $18,000. Their total IRA distributions add another $40,000 due to required minimum distributions. This gives Frank and Edith a total income of $82,000.

After reducing their income by the standard deduction of $27,000, their taxable income would be $33,450 resulting in a tax burden of $3,626. This is an effective tax rate of 4.4%.

Now let's assume Frank dies first.

Edith can now take Frank's higher SS income benefit. In the example above, Edith would now have SS income of $24,000 plus $40,000 in IRA distributions for a total income $64,000.

After taking the standard deduction of $13,500, Edith will have taxable income of $46,300 resulting in a tax burden of $6,045 which is an effective tax rate of 9.4%.

So even though the household income went DOWN by 22%, the tax burden went UP by 67%!!

This makes a strong case for making sure you provide for your spouse after your death through TAX FREE income. The best way to do this is through life insurance. The death benefit can offset this jump in taxes, eliminating one stress that comes from losing a spouse.

If you don't have life insurance now, please take the steps necessary today to get insured!

By the way, life insurance is more than just a "one trick pony" (death benefit). It can provide significant living benefits as well. That will be my next post.

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