SS and taxes

[NW-Bound]

... A significant problem is when one spouse dies. The tax write off is cut in half and there is often a 2 level increase in bracket. SS from one spouse is lost as well. So if your at top of 12% as a couple you can easily reach into 24% as a single depending on the RMD. Basically one spouse dies and Uncle Sam climbs into the bed with the remaining spouse to drain the account...

I forgot this tax increase when one spouse dies. OK, this is going to make it more complicated.

I will need to look into this some more. Even after the conversion to the top of 24% and more than 1/4 million bucks in taxes, I would still have a lot left in tax-deferred. But will the balance be low enough at RMD time? And for a single payer? Guess I need to look into it.

 

[bingybear]

It's not just getting the TIRA down, but taxable assests also can contribute the the tax problem when one spouse passes. We've seen that with DMIL. And if you inherit from a non-spouse (TIRA) then you have TIRA that can't be converted.

you can help the problem by sandbagging your investment performance, but in the long run that lowers tax buy stiffing investment returns.

I'm guessing that you have not been doing the conversions for the tax on SS, but the tax on TIRA withdraws in general. Am I interpreting this correctly

 

[Fedup]

I’m with Doc0, I love the line, when one spouse dies and Uncle Sam climbs into bed. That’s why I plan to reduce some from TIRA, at least minimize its size for RMDs purpose. This ties back to when to take SS.

 

[Doc0]

My solution to taxable accounts was to tax loss harvest during downturns. I have about 400K of tax loss available to use against capital appreciation. Here is an article I wrote explaining some of these ideas. Tax loss harvest plus taxable appreciated stock is how I generate my bankroll to live on. There is no tax consequence to selling this stock. I call it my rich man's Roth

https://www.dadsdollarsdebts.com/2018/04/14/how-to-do-a-roth-conversion-and-optimize-taxes/

I've done more work since with commercial software but my numbers and the professional numbers are pretty close. If nothing else it tells you how to think about things. This is analyzed around a 1.5M TIRA and 4 years of conversion. If I had say 2.5M I'd move to a 6 or 7 year conversion. I also did more work after this article fine tuning SS payout

 

[Doc0]

The conversion is not to adjust taxes by minimizing SS taxes but to adjust overall life long tax burden and try to lock that in as a knowable expense both as a single and as as married. I view retirement as a series of epochs not as one continuous thing. I'm in "Roth conversion epoch" right now and I've optimized my financial situation for this epoch. Next will come my wife's SS and me taking spousal epoch. Then will come my taking SS and her taking spousal and my taking any residual RMD epoch. Then will come her taking any residual RMD epoch. You can tune each epoch for max benefit, and you can project onto the next epoch/s what will be the best maneuver today to maximize the benefit in the future. Example I tax loss harvested over 3 recessions. It was something I could do and it's paid off decades into the future. There will be another recession so even if retired you can tax loss harvest tax lots underwater and bank the loss for the future and then use the loss as needed. Another way to manage too much RMD is as you close on death consider gifting the TIRA to a kid. If you have more than you can spend get rid of some instead of paying taxes.

 

[RunningBum]

Another way to manage too much RMD is as you close on death consider gifting the TIRA to a kid. If you have more than you can spend get rid of some instead of paying taxes.

Can you really do this? Has it changed since this article from 2014, that says

So if you have a traditional IRA, the short answer is no, you can't avoid paying income taxes on a withdrawal by making it a personal gift.

https://www.schwab.com/resource-cen...give-part-of-your-ira-to-your-family-tax-free

 

[Doc0]

You don't gift a payment you jettison IRA ownership.

 

[RunningBum]

Other than through a divorce decree, I've found nothing that says you can do this before you die. Do you have a source that says you can?

 

[Fedup]

I like to know as well, but how about what does it mean by jettison IRA ownership. New vocabulary for me.

 

[Tadpole]

I forgot this tax increase when one spouse dies. OK, this is going to make it more complicated.

If I died the last day of this year, my husband's income would drop by 19% and his taxes would increase by 47%. The overall decrease in after tax income would be 25%.

 

[Souschef]

I do not see that, unless I messed up the TT What if. I copied all the data from last year's return, deleted her SS, pension, and RMD. I changed my status to single and deleted one personal exemption. My taxes dropped by $1700.
I can see if the spouse had minimal or no pension, and low SS, it would be a bigger hit.

 

[pb4uski]

Other than through a divorce decree, I've found nothing that says you can do this before you die. Do you have a source that says you can?

+1 I've never read of this anywhere or heard of it.

 

[bingybear]

I do not see that, unless I messed up the TT What if. I copied all the data from last year's return, deleted her SS, pension, and RMD. I changed my status to single and deleted one personal exemption. My taxes dropped by $1700.
I can see if the spouse had minimal or no pension, and low SS, it would be a bigger hit.

you deleted her RMD. Hummmm... so when she passes what does be come of her TIRA or 401k? Does it go to you? or to someone else. If to you... they it may have a different RMD schedule. Your SS may change at her death and pensions will depend on how they are configured (single life or joint)

 

[Souschef]

you deleted her RMD. Hummmm... so when she passes what does be come of her TIRA or 401k? Does it go to you? or to someone else. If to you... they it may have a different RMD schedule. Your SS may change at her death and pensions will depend on how they are configured (single life or joint)

Her TIRA goes to her sons, as an inherited IRA, they will, BUT they will be paying the RMD, not me. I agree that if I inherit her IRA, the taxes would be higher since I am older.

My SS will not change, as it is based on my earnings
Her pension will go away as she got it from her late husband.
I think the issue of whether taxes go up or down when one spouse dies has so many variables. In my case they would go down.

 

[NW-Bound]

If I died the last day of this year, my husband's income would drop by 19% and his taxes would increase by 47%. The overall decrease in after tax income would be 25%.

The IRAs will be combined, and the RMD will stay the same if the couple are of the same age. The tax will be higher for a single person.

Here's an example. A couple has SS of $40K and $30K. They can have an RMD of $50K at the age of 70 (IRA balance of $1.4M), and pay an income tax of $7329 on a total income of $120K.

If one dies, the survivor keeps the higher SS of $40K. With the RMD of $50K, the survivor pays a tax of $11,428 on an income of $90K.

 

[CardsFan]

OP here. Souschef's comment has me thinking about how we might set up inheritance of our IRA's. It might make some sense to direct a portion of them directly to DS when one of us departs. If there is more than enough in the other accounts, why not send some early?

 

[NW-Bound]

If he/she is working with a decent job, his/her RMD when added on top of his/her income will drive his/her tax rate way up.

Just a quick look at my kids, and I see that if we croak early and leave our tax-deferred asset to them, my son who is single will be in the 37% bracket with his would-be RMD.

It's better if I "prepay" the tax at my own lower rate.

 

[bingybear]

Her TIRA goes to her sons, as an inherited IRA, they will, BUT they will be paying the RMD, not me. I agree that if I inherit her IRA, the taxes would be higher since I am older.

My SS will not change, as it is based on my earnings
Her pension will go away as she got it from her late husband.
I think the issue of whether taxes go up or down when one spouse dies has so many variables. In my case they would go down.

yes you are right that it does have many variables. Usually people are taking RMDs when they talk about the RMD torpedo. It is often assumed that most income comes from RMD and somewhat equal between spouses and that the first beneficiary is the spouse. In this case (and assuming reasonable RMDs) what happens is the income stays about the same and the filing goes from joint to single. This gives a jump in taxes.

obviously YMMV

 

[bizlady]

Thanks for the quick responses.

Regarding simplicity: Eliminating DW's tIRA means we only need to withdraw from one.

Perhaps this varies by state (and of course could change), but does anyone think about balancing retirement accounts between spouses rather than depleting one? I think, in our state at least, that if a couple is self insured for LTC, and one spouse needs to enter a nursing home, the "at home" spouse's retirement accounts are not subject to spend down. Maybe I am wrong on this, but otherwise this seems to be a consideration for us.

 

[MissMolly]

Perhaps this varies by state (and of course could change), but does anyone think about balancing retirement accounts between spouses rather than depleting one? I think, in our state at least, that if a couple is self insured for LTC, and one spouse needs to enter a nursing home, the "at home" spouse's retirement accounts are not subject to spend down. Maybe I am wrong on this, but otherwise this seems to be a consideration for us.

For Medicaid purposes, all income - his, hers and theirs - is combined, regardless of who earns the income or owns the asset. Although variable by state, the amount of income the spouse brings in is subject to minimum and maximum amounts. This means that if the remaining (community) spouse is below the minimum, then they may also be allowed to keep some of the income from the spouse in the nursing home. Until July 1, 2018, the minimum amount that a state must allow a community spouse to keep is $2,030, and the maximum is $3,090. The community spouse is generally allowed to keep 1/2 of the couple's assets but there are also minimum and maximum amounts for these assets. Currently the federal minimum is $24,720 and the maximum is $123,600. The marital home is protected, but again is subject to a maximum amount, which is really quite generous. The first $572,000 is excluded and in some states may go as high as $858,000.

 

[kaneohe]

The current thread on taking SS early got me thinking (again) about when to take and the tax implications.

So.. I used this calculator to run some scenarios: https://www.olt.com/main/home/taxestimator.asp

..................................
So, the questions for this group:
1. Has anyone used the referenced calculator, and have you found it to be fairly accurate?
...........................................

I would suggest that you always check your calculations w/ other tax calculators. I only recently discovered this calculator and thought I liked it.....reminded me of the mortgage calculator 1040 that I like.

However, I recently thought I had found a bug relating to the savers credit. It consistently seemed to give the wrong answer or so I thought. I wrote to them and they told me they didn't think there was a problem. When I went back to see, it was working normally. Since they did not admit guilt, I can't be absolutely sure I saw what I saw originally....bit I'm pretty sure.

Subsequently I found another problem with OLT not calculating LTCG taxation correctly. I am absolutely sure this time. This time there was not a "timely" response to my feedback so I set another message this morning. Just before I wrote this, I thought I should check to see if they had replied. They had saying they had fixed the problem.......I checked and they had so I will give them an A+ in responsiveness to feedback.

However I will continue to believe that you should have an independent check......similar calclators : mortgage calculator 1040 (aka Dinkytown),
HR Block tax calculator, Taxcaster.