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3 "Stealth Taxes" that Increase Your Tax Bill Without You Knowing

Eric Sajdak • May 28, 2020
It is your right as an American to (legally) pay the least amount in taxes that you owe—nothing more, nothing less. 

But in recent years, Congress has made a concerted effort to shift the IRS code and levy you with taxes you didn't even know you were paying.

We call these "Stealth Taxes." 

These changes are never talked about by your congressman (or woman). They lie deep within the tax code and can potentially cost you significantly unless you learn about how to avoid them.

In this article, we cover three of those "Stealth Taxes" and what you can do to minimize or avoid them altogether. 

Stealth Tax #1 - Bracket Creep


Most taxes in the tax code are adjusted for inflation. 


For instance, in the past, the federal income tax brackets have always been adjusted for inflation. If inflation rises 2%, tax brackets are adjusted 2% higher. This makes sense. Otherwise, over time, we would all be pushed into higher tax brackets due to nothing other than inflation. 


Well, in 2017, as part of the Tax Cuts and Jobs Act, there was a critical change made. Many of you likely missed it with everything else in the bill.


Congress changed the way tax brackets adjusted for inflation. 


They changed from the standard measurement of inflation CPI to something called a Chained-CPI. This seemingly small change will have massive implications over the long term. 


From 2000- 2018, this Chained-CPI adjustment would have resulted in tax brackets receiving a 13% reduction in the amount tax brackets adjusted to inflation.

What does this mean? 


Your taxes in the future are going to be higher than you previously thought.


Stealth Tax #2 - The Social Security Tax Trap


The tax trap (or tax torpedo) can be one of the single most confusing parts of Social Security. 


We've discussed it on this blog in the past - click here to read that post.


Most retirees don't know that when they enter retirement, they enter into a different tax system than when they were working. This is because of how Social Security is taxed. 


Let's explain with an example.


We have a couple who is filling their income needs with Social Security (total benefits = $40,000) and withdrawals from their IRAs (amount = $40,000). 


Based on Social Security taxation guidelines, up to 85% of their benefit would is taxable. Based on their taxable income*, they will be in the 12% tax bracket. 


Quiz time, if they decide to go on a family vacation this year and decide to pull an additional $1,000 from their IRAs, what tax rate would they be taxed at?


If you said 12%, you'd be wrong. Because of Stealth Tax #2, their actual tax rate would be 22.2%. 


Here's how:

  • Because of the additional $1,000 withdrawal, taxable income goes up by $1,000.
  • Because of the additional $1,000 withdrawal, an additional $850 of Social Security Benefits becomes taxable
  • At the 12% rate, taxes on $1,850 are $222
  • The "Tax Cost" of the extra $1,000 withdrawal is $222 or 22.2%


This tax trap can not be understated enough. At its peak, it can cause you to pay 40.7% in taxes when you think you're only paying 22%. It can cost the average retiree up to $5,000 a year in extra taxes!


*For simplicity sake, I do not include deductions in this example


Stealth Tax #3 - The 3.8% Obamacare Surtax


This stealth tax is critical for retirees with taxable accounts or retirees selling large amounts of real estate. 


In 2010 as part of the Affordable Care Act, a tax was levied on capital gains for investors that were deemed "too wealthy".


Normally capital gains rates are either 0%, 15%, or 20% depending on where your taxable income falls. The Obamacare Surtax adds 3.8% to this in certain cases.


This brings the actual capital gains rates to 0%, 15%, 18.8%, or 23.8%. 


For individuals, this tax is levied if taxable income rises over $200,000, for couples, this tax is levied at $250,000. Notice how the income threshold is significantly less ($200,000 vs. $250,000) for married folks. This surtax also can greatly affect dividend income!


The existence of this tax can be described as a Stealth Tax but it really becomes apparent this is a hidden tax when I tell you the threshold amounts for this tax haven't been adjusted since its inception!


So whether they know it or not, every taxpayer is drifting closer and closer to being affected by this added tax.


- - - - - - - - - - - - - - - - - - - 


Each of these stealth taxes presents a different problem for retirees. Especially when you think about trying to prevent them. Does saving on taxes this year, raise my taxes next year and down the road? Or vice versa? 


We've always pounded the importance of a Forward-Looking Tax Plan. This is more important now more than ever before with:

  • A skyrocketing national debt becoming out of control
  • Congress seemingly adding more of these "Stealth Taxes" to the tax code
  • COVID-19 stimulus effort quickly adding trillions to the national debt


No matter which way you slice it, all signs point to higher taxes in the future. Are you prepared? 


Always remember:


You Don't Need More Money. You Need a Better Plan. 

File at 62 vs. Delay: At What Age Do I Break Even on Social Security?

By Eric Sajdak, ChFC® • July 7, 2020
"If I delay my Social Security benefit, at what age would I breakeven versus simply filing at 62?" We field this type of question frequently from retirees. The Social Security system allows you to file anytime between 62 and age 70. At first glance, filing at 62 seems to make the most sense. After all, there are 12 months in a year and eight years between ages 62 and 70—That's 96 months of monthly paychecks that you wouldn't be getting if you delayed. However, you get penalized for taking your benefit early. Below is a diagram showing the penalties and delayed credits for someone whose Full Retirement Age is 66:

Fair Value, Now What?

By Tony Hellenbrand • June 30, 2020
Lately I’ve been getting asked how I was able to “Call the Bottom” in late March. I want to make something clear: I didn’t. If you go back and look at the article from March 16th or read the email I sent out to subscribers on the 26th, (pure dumb luck), I ran a bad case, a best case, and a base case valuation on the S&P 500. I arrived at a base case valuation of 2,950, and at the time the S&P was hovering around 2,300, so we started recommending clients initiate buying plans. These plans did not mean “This is the bottom” or “Go all in.” Far from it. Many of our clients were buying several days before the precise bottom, and several days and weeks after. Regardless of how clearly I try to make this point (that we simply were buying something the math said was likely cheap) this morning my inbox is chock full of people asking what I think about valuations now. Are we in a bubble? Is the market ahead of the fundamentals? Are we going to double dip? Will the market crash? Will we need a second stimulus? Maybe. I have no idea. Here’s what I know, when you accumulate all of the available earnings estimates and make a conservative estimate of fair value, you end up with a fair value of about 3,060 on the S&P 500. As I type this we sit at 3,080. Regardless of whether the number is 2,950 or 3,060 or 3,080 or 3,150, any way you slice it, we’re at fair value, now. Analyst Earnings Estimates:

Risk-Free Assets

By Tony Hellenbrand • April 1, 2020
Greenwich, CT. May 2008. Feels like forever ago. Another life. Hard to believe it was just over a decade ago. My first “Real” job. Analyst for S.N. Phelps & Co., a firm that managed money for a bunch of insurance companies. In the open office environment, my boss, the firm’s proprietor, the late Stanford Phelps, sat directly across the desk from me. After exchanging pleasantries and sipping my coffee, Stan asked me a question: “What assets are risk free?” As with all of his questions, it was a test, a teaching moment and a trap, all rolled into one. I knew the academic answer of U.S. Treasuries wouldn’t cut it, here. My mind raced. I knew Stan was a well known student of George Patton and demanded fast answers, even if incorrect. “There aren’t any.” I answered, praying for my job. Thankfully I had a month-to-month lease. Please don’t fire me. Please don’t fire me. Please don’t fire me. He smiled “That’s an ok answer…” I exhaled. “But there’s a better one,” Stan continued, “EVERY asset is risk-free IF you buy it cheap enough. This building. If I bought it for a nickel, is there really any way I lose money on it? Even if I do, I lose a nickel. If I buy Manhattan for a buck, can that really hurt me?” “No.” I answered. “Even if it goes up and down in value 95% every day, it doesn’t matter.” Stan smiled and pounded the desk with glee, “That’s exactly right!” Will I make the case that stocks are risk-free at these levels? No. Definitely not. However, there is a price where they are so cheap that it’s difficult to lose. Is that level 20,000 on the Dow? No. But some individual names are already getting down to the point where someone beginning a buying plan from these levels that can stick it out for a few years is going to make generational wealth. “Buys of a lifetime.” According to Kyle Bass’s recent CNBC interview where he exclaimed “You can be a value buyer again!” This concept of price and risk can also work against you. Return-free risk. If you paid $1 Trillion ($1,000,000,000,000) for the device you’re reading this article on, there’s realistically a 100% chance you lose all the money. I would argue we’re seeing this in the market right now, in the form of bonds. As I type this, the 10 year Treasury is paying 0.63%. An investor buying a 10 year Treasury today is paying 158x earnings for an asset that can’t grow earnings for 10 years. If you own bonds today... Why? So-called “Safety” is ludicrously over-priced at these levels. How dangerous is a stalwart like Clorox (CLX)? The chart would say it’s not nearly as dangerous as the rest of the market, holding up well the last few weeks. You “only” have to pay 27x earnings and collect a 2.42% dividend, essentially 4x as good of a value as bonds. Not cheap enough? Diageo, one of the largest liquor distillers in the world, is currently at 19x trailing earnings. Put differently, Diageo, a large, stable, growing business, has an earnings yield over 5%. Why accept 0.86%? Not cheap enough? Let’s get real crazy. The Dow Jones Industrial Average is trading at 17x earnings. That’s a 5.9% earnings yield. Is more trouble ahead? Yes. Will some of them fall to zero? Yes. Is the bottom in? Who knows. (probably not.) All I know is if you can wait 10 years, I’ll take 5.9% over 0.63% every time.
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