Widows beware!

[Sunset]

Quote:

Originally Posted by nativenewenglander That makes me think that I'll be better to take my SS at 62 and the same for my wife who is 5 years behind me. Am I missing something?

Yes, you will severly limit your ability to covert IRA money to Roth as you will already be making (estimated) $20,000 in SS.

[athena53]

Quote:

Originally Posted by zedd OMG! We lost Athena mid-sentence

Not sure what happened there!

[harley]

So, my strategy to minimize this issue is for both of us to live a long time, then die pretty close to each other. They might get a year or two of higher taxes out of us, but in the long run we'll win. Haha!

[bclover]

Quote:

Originally Posted by Chuckanut I know a lot of people who would love to have the 'tax bomb' problem caused by a higher income at 70. The usual complaints are that the SS check is 'not enough to live on'. For many of us there is not good way to avoid the problem. If possible we convert to Roth IRA and fill up the 15% bracket. But, if one has a descent pension or other source of income, the 15%bracket can fill up before much money can be converted. OTOH, having a descent source of income that fills up most of the 15% bracket is a problem many people would love to have.

My "attitude of gratitude" reminder. thank you. I became a widow at 51, my wonderful husband loved us enough to set us up for life, after attending grief counseling groups I know for a fact that this is not always the case.

Unless something changes and it could, I will start hubby's benefits in a few years when I hit 62 and turn mine on at 70.

[Hermit]

My pension puts me in the 25% tax bracket. Always has and likely always will. I could have delayed that pension. The kind folks at Megacorp would have increased my pension something like $5 per month per year of delay. I decided it would be better to just take the pension. So when I retired, I had the choice of taking the late DW's SS or mine. I chose to take hers and let mine grow to 70. Hers was about 66% of mine at retirement. Like others in this situation, the SS will pretty much pay for taxes for the rest of my life. (The Gubmint giveth and the Gubmint taketh away. ) I can't say I calculated all the alternatives. It just seemed that the fact that I would never be below 25% (and thus always paying taxes on 85% of any SS) put me in a place where it was best to maximize the SS payments and pay the taxes. I don't think I screwed this up and am loosing out on a bunch of money, but if you disagree, please let me know.

I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

[audreyh1]

Right - we also will probably use part of the RMD to gift directly from the IRAs to qualified charities.

[Fedup]

Quote:

Originally Posted by zedd A lot of suddenly widow or widower filers could find themselves bumped from the 15% to 25% bracket simply because they would go from filing "Married Filing Jointly" to filing "Single". That could happen at any age.

This is one reason I make sure my husband takes care of himself. I don't want to be in 25% bracket.

[Hermit]

Quote:

Originally Posted by Fedup This is one reason I make sure my husband takes care of himself. I don't want to be in 25% bracket.

I can agree with the sentiment but, on the other hand I have no intention to get married to solve that problem!

[Fedup]

Quote:

Originally Posted by Hermit I can agree with the sentiment but, on the other hand I have no intention to get married to solve that problem!

Trust me, I won't get married again either so I understand the sentiment. Why ruin a good memory of a good marriage.

[Sandy & Shirley]

Quote:

Originally Posted by zedd A lot of suddenly widow or widower filers could find themselves bumped from the 15% to 25% bracket simply because they would go from filing "Married Filing Jointly" to filing "Single". That could happen at any age.

True, but there again is where being aware of the possible future and doing proper planning comes into play.

The brackets shrink, but so do some of the guaranteed income sources like SSB, some pensions and annuities. How are the assets of one partner passed to the other?

For example, our Annuities are not joint. They have a cash value which declines as the payments are made and the remaining cash value, if any, becomes a tax free inheritance.


Keep your wills up to date as the laws change.

[braumeister]

Quote:

Originally Posted by Hermit It just seemed that the fact that I would never be below 25% (and thus always paying taxes on 85% of any SS) put me in a place where it was best to maximize the SS payments and pay the taxes. I don't think I screwed this up and am loosing out on a bunch of money, but if you disagree, please let me know. I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

Exactly my situation. Good problem to have, and a nice feeling to make those big QCD contributions to causes you love.

[gerntz]

Quote:

Originally Posted by Hermit I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

Not to cramp your style, but those are limited to $100K/yr/person.

[2017ish]

Quote:

Quote: Originally Posted by Hermit View Post I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

Quote:

Originally Posted by gerntz Not to cramp your style, but those are limited to $100K/yr/person.

That's intriguing. Makes sense on one level, as Uncle needs his sugar--but seems inconsistent with much of the tax law governing nonprofits. Of course, this area is a tangled mess of policy clashes; many tradeoffs in the sausage making....

[audreyh1]

Quote:

Originally Posted by Hermit It just seemed that the fact that I would never be below 25% (and thus always paying taxes on 85% of any SS) put me in a place where it was best to maximize the SS payments and pay the taxes. I don't think I screwed this up and am loosing out on a bunch of money, but if you disagree, please let me know. I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

We're in a similar situation. Our ordinary income is well within the 15% tax bracket, but our cap gains income is high, stretching well beyond it. Which actually pushes us into AMT territory, which means any additional ordinary income gets taxed at 26%.

But at least we still get the advantage of the 0% cap gains tax on cap gains income between where our ordinary income stops and the top of the 15% tax bracket. AMT doesn't change cap gains tax rates, just taxes on ordinary income.

We're going for the lower taxes now strategy. Who knows what will change. Tax brackets are indexed for inflation. We may have deductible medical expenses that will help lower taxes when we are older. We may be able to gift more to charity if our income stays higher. We might be able to lower income through clever tax loss harvesting. Actually I think we're on a path that will lower total taxable income in the future since I've been gradually shifting to more tax efficient investments and will do so more aggressively during future bear markets. Interest rates going up - getting paid higher dividends on bonds - will blow a hole in that though if they return to the rates more typical in the 2000s. I'm not willing to reduce fixed income exposure in the interest of tax efficiency yet. So, you just do what you can year by year.

[Hermit]

Quote:

Originally Posted by gerntz Not to cramp your style, but those are limited to $100K/yr/person.

I'm not in that league.

[Walt34]

Quote:

Originally Posted by Fedup This is one reason I make sure my husband takes care of himself. I don't want to be in 25% bracket.

Aha, the true reason married men live longer than single ones!

[Sandy & Shirley]

Quote:

Originally Posted by Hermit I do have one strategy for getting around this. I plan to give my RMDs to charity in the form of QCDs for quite a few years when I turn 70 1/2.

Excellent point, thanks! For those who did not know what a QCD was and how it effects your taxes, let me be specific, after all the entire purpose of starting this thread was to point out to widows and others how to avoid the 46.25% tax bracket.

If you took a $1,000 MRD while barely in the 25% bracket, that $1,000 would make $850 additional dollars of your Social Security taxable income. You would then pay 25% or the $1,850 of additional AGI which is $462.50. Even if you then contributed the $1,000 to a charity, your income would still have been increased by the $850 of taxable Social Security and you would still pay an additional $212.50 in taxes.

You can avoid all taxes if you have your broker do a direct transfer of your MRD to a qualified charity. Your MRD would then be reported, by your broker, as a QCD, Qualified Charitable Distribution, it was never part of your AGI, so it never made any additional SSB taxable.

Again, thanks for pointing that out.

[audreyh1]

The only issue with RMD charitable gifts is that the recipients are more restricted than regular charitable gifts that can be deducted on schedule A - public charities only. For example, donor-advised charitable funds do not qualify for direct RMD donations.

Just good to be aware of that when you do your planning.

Quote:

To qualify for QCD treatment, the rules also stipulate that the distribution must go to a public charity (as described in IRC Section 170(b)(1)(A)), and thus cannot go to a private foundation, nor (as specified in the tax code) may a QCD go to a charitable supporting organization or a donor-advised fund, either. In addition, the charitable distribution from the IRA must be one that otherwise would have been eligible for a full charitable deduction under IRC Section 170 (even though QCDs are not eligible for a deduction, as discussed below). This “must have been eligible for a full deduction” rule ensures that the IRA donor does not receive any kickbacks or other “quid pro quo” benefits for the donation (which would limit the donor’s deduction to only the net amount contributed and fail the “full deduction” QCD requirement). This requirement also prevents any “split-interest charitable trust” (e.g., a charitable remainder trust or a charitable lead trust) from being an eligible QCD beneficiary.

https://www.kitces.com/blog/qualifie...-requirements/

[Hermit]

Quote:

Originally Posted by PapaGeek Excellent point, thanks! For those who did not know what a QCD was and how it effects your taxes, let me be specific, after all the entire purpose of starting this thread was to point out to widows and others how to avoid the 46.25% tax bracket. If you took a $1,000 MRD while barely in the 25% bracket, that $1,000 would make $850 additional dollars of your Social Security taxable income. You would then pay 25% or the $1,850 of additional AGI which is $462.50. Even if you then contributed the $1,000 to a charity, your income would still have been increased by the $850 of taxable Social Security and you would still pay an additional $212.50 in taxes. You can avoid all taxes if you have your broker do a direct transfer of your MRD to a qualified charity. Your MRD would then be reported, by your broker, as a QCD, Qualified Charitable Distribution, it was never part of your AGI, so it never made any additional SSB taxable. Again, thanks for pointing that out.

With QCDs you can also keep your Modified Adjusted Gross Income below one or two of the steps for added "premiums" on Medicare Part B and Part D. The Part B annual steps are shown below for singles such as a widow or widower. Part D costs depend on how your Part D costs are set up with your insurer but likely in the hundreds or low thousands per year.

$0 = $1608.00
$85k = $2250.00
$107k = $3214.80
$160k = $4179.60
$214k = $5143.20

https://www.medicare.gov/your-medica...t-b-costs.html