One key to success in our business is helping our prospects and clients “find” the money to save and invest in products that will benefit them and their families.

Last month I shared an idea about how to inspire prospects and clients by explaining the value of paying taxes now, instead of later in a higher tax environment. I would like to expand on that idea this month.

This example assumes that the clients are a couple over the age of 65, filing a joint income tax return, and taking the standard deduction. There are obviously many other permutations; however, the “idea” remains the same regardless of the various filing statuses.

Here we go: 

  • The standard deduction for this couple for 2013 is $14,600. They each receive a personal exemption of $3,900. So, $14,600 plus $7,800 is $22,400. Our couple can make $22,400 of taxable income and pay no federal income taxes.
  • The next $17,850 is taxed at 10 percent, or $1,785. If we add $22,400 and $17,850, the total is $40,250. So if our couple has $40,250 of taxable income, they pay $1,785 of federal income tax. That is 4.5 percent.
  • The next $54,650 is taxed at 15 percent, or $8,198. If we add $22,400 and $17,850 and $54,650, the total is $94,900. So if our couple has $94,900 of taxable income, they pay $9,983 of federal income tax. That is 10.5 percent.

Now it is time to get excited! I ask, “Do you think taxes are going to be higher in the future? Do you think it would be a good strategy if you could eliminate the taxes on $94,900 of taxable income for your family by paying only 10.5 percent in tax? Do you want to control your taxes or do you want to be controlled by your taxes?” 

Progressive nature of income tax

Most Americans do not understand the progressive nature of income tax law. If we add annuity growth and IRA lump sums to our inheritors’ current earned incomes they would pay much higher taxes on that money because of the progressively higher tax. With the government discussing the elimination of inherited IRAs, the elimination of stepped-up basis, and reductions in itemized deductions, wouldn’t families benefit from a tax reduction strategy?

I even made up my own rule for guidance. I call it “The Rule of 95-15.” If my prospects or clients have taxable income of less than $95,000, then they are in the 15 percent income tax bracket. That tells me several things. First, they pay zero percent capital gains tax. Second, they only pay $9,983 (or 10.5 percent) on that $94,900 of taxable income.

I ask, “Would you like to work together as a family to eliminate enormous amounts of income tax on your taxable income?”

They always want to explore the opportunity!