Why Most Elderly Pay No Federal Tax

[Hermit]

Quote:

Originally Posted by Options It's called tax bracket management and is a very important part of retirement planning. Fees and taxes are what eat into PF returns. It can be surprising the degree to which taxes can be minimized in retirement.

I'm listening!! How do I minimize taxes on a pension and SS that puts me solidly in the 25% tax bracket? BTW I'm over 65 so I get a large standard deduction that takes care of that side of taxes.

[Souschef]

We both collect SS and have small pensions. The thing that pushes us up into the higher bracket was our RMD's. I should not complain, because there is still plenty left after taxes.
The shock I got last year was a large CG distribution by one of our funds. That really pushed us up into the 25% bracket.

[Sarpy]

Quote:

Originally Posted by Souschef We both collect SS and have small pensions. The thing that pushes us up into the higher bracket was our RMD's. I should not complain, because there is still plenty left after taxes. The shock I got last year was a large CG distribution by one of our funds. That really pushed us up into the 25% bracket.

Re. the large CG distribution, same thing happened to us. IMO, we really need to get a tax advisor--we've both been retired several years and are getting killed on taxes. Now to convince DH.

[athena53]

Quote:

Originally Posted by Souschef The shock I got last year was a large CG distribution by one of our funds. That really pushed us up into the 25% bracket.

We've had that- totally out of our control and generally a "surprise" at year-end.

Early on I bought Berkshire in an IRA because that was where I had free cash. I realized how silly that was- Berkshire pays no dividends so it generates zero taxable income. As we put new money into the after-tax accounts and bought BRK and sold the shares in the IRA. As DH noted, Berkshire is basically a giant mutual fund. Bonus: occasionally we drive to Omaha for the annual meeting.

[ziggy29]

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Originally Posted by athena53 Early on I bought Berkshire in an IRA because that was where I had free cash. I realized how silly that was- Berkshire pays no dividends so it generates zero taxable income. As we put new money into the after-tax accounts and bought BRK and sold the shares in the IRA. As DH noted, Berkshire is basically a giant mutual fund. Bonus: occasionally we drive to Omaha for the annual meeting.

Yeah, Berkshire is an ideal stock to hold in a taxable account. I once knew someone who held a bond fund in their taxable retirement investment account and Berkshire in their IRA. Oops.

[Hamlet]

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Originally Posted by Hermit I'll never get below the 25% tax bracket. Personally, I think its not such a bad problem to have.

Hear, hear.

Paying high taxes is like aging- no one likes it but it sure beats the alternative.

[Fermion]

I read a lot about people saying they would rather pay a lot of tax than little or no tax (because the thinking is they have more income).

I have found recently the opposite feeling. Before, when we were paying an effective tax rate of 26% or so (higher if you count all the little add-ins) I would get upset when I saw what I perceived as unfairness, cheating and waste. Now it rolls off and I don't stress about it because I know I am not paying for it.

One of the last unavoidable taxes, high property tax, we hopefully will also be jettisoning on the sale of our house. No more looking at the swimming pool size potholes in our neighborhood street and wondering why some of the $5,000 a year doesn't go for that instead of a bonus for the city council.

[friar1610]

Has nothing to do with Federal taxes, but we moved from VT to MA several years ago. VT taxes EVERYTHING! MA doesn't tax SS or federal/military pensions. The bulk of our income is from a Navy pension and SS, so that was a nice pay raise. Like others who have commented, we will perpetually be in our current tax bracket thanks to those income sources and, now, RMDs.



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[Car-Guy]

And don't forget about the Medicare "income relate premiums". (a.k.a means testing for Medicare premiums) It doesn't take much for your MAGI to start bumping up your monthly premiums. It looks like I'm going to be paying more in monthly Medicare premiums than I did for my private medical insurance coverage before I turned 65, and I "had" really good insurance.

https://www.ssa.gov/pubs/EN-05-10536.pdf (See page 8)

I've read that the income used in determining your Medicare Part B premium is taken from income reported two years prior on your IRS income tax return. Part D goes up too.

[youbet]

Quote:

Originally Posted by Sarpy IMO, we really need to get a tax advisor--we've both been retired several years and are getting killed on taxes. Now to convince DH.

I tried the tax advisor route briefly years ago and it didn't help. Unless we wanted to venture into activities (own a business or apartment buildings or such) that as retiress we had no interest in, there was no relief. We were already doing the basics of tax managing our investments, SS and pensions and came to realize the penalty for having these is paying taxes.

You might want to have a highly recommended CPA look over your taxes during the slow season and ask if he/she has any ideas on moves you could make or strategies you could embrace. But you'll find that most of the basics are widely publicized and you're probably taking advantage of them already.

[youbet]

Quote:

Originally Posted by Car-Guy And don't forget about the Medicare "income relate premiums". (a.k.a means testing for Medicare premiums) It doesn't take much for your MAGI to start bumping up your monthly premiums. It looks like I'm going to be paying more in monthly Medicare premiums than I did for my private medical insurance coverage before I turned 65, and I "had" really good insurance. https://www.ssa.gov/pubs/EN-05-10536.pdf (See page 8) I've read that the income used in determining your Medicare Part B premium is taken from income reported two years prior on your IRS income tax return. Part D goes up too.

Yes, IIRMA is a pita and we're into it too. The fact that they do not / will not adjust the IIRMA income limits with inflation will just make it worse as we go along and more and more folks will find themselves paying this penalty.

SS uses the latest tax year they have at the time they calculate your IIRMA penalty. IRS apparently doesn't make the info available to them immediately. So, for example, when my letter came late in 2015 telling me my IIRMA penalty for 2016, it was based on my 2014 filing.

We're having the same experience you are. Our costs for med insur at 65 and older are actually higher than they were at 64 and younger. We hadn't planned for that and had to make a budget adjustment.

It's still good to be retired!

[youbet]

Quote:

Originally Posted by Options It can be surprising the degree to which taxes can be minimized in retirement.

Throw out a few of your best ideas for minimizing taxes in retirement........

In fact, anyone and everyone throw out their best ideas.

At 68 yo and with pensions, SS and investment income plus RMD's on the horizon, I just can't find anything (that isn't really complicated or that doesn't require active involvement like starting a sham business) to help. I did Roth conversions when it was appropriate, keep my investments in the right taxable or tax-deferred buckets and work hard to max my misc deductions by keeping good records, etc. Yet, no surprises about how low retirement income taxes are at our house.

I gotta be missing something!

[daylatedollarshort]

Quote:

Originally Posted by youbet Throw out a few of your best ideas for minimizing taxes in retirement........ In fact, anyone and everyone throw out their best ideas. At 68 yo and with pensions, SS and investment income plus RMD's on the horizon, I just can't find anything (that isn't really complicated or that doesn't require active involvement like starting a sham business) to help. I did Roth conversions when it was appropriate, keep my investments in the right taxable or tax-deferred buckets and work hard to max my misc deductions by keeping good records, etc. Yet, no surprises about how low retirement income taxes are at our house. I gotta be missing something!

I always liked this article from the WSJ on how to pay zero taxes on $150K in income, but it does include owning a real business:

ROI: How to Avoid Paying Income Taxes - WSJ

"If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool."

[GrayHare]

Quote:

Originally Posted by youbet Yes, IIRMA is a pita and we're into it too. The fact that they do not / will not adjust the IIRMA income limits with inflation will just make it worse as we go along and more and more folks will find themselves paying this penalty.

The IRMAA tiers are changing come 2018, which will be based on 2016 tax filings, however the impact will be to increase IRMAA. http://www.investmentnews.com/articl...-beneficiaries

If you have a "life-changing event" that causes your MAGI to drop by a tier or more, you can apply to have your IRMAA reduced before the tax return info finds its way to SSA/CMS.

[mickeyd]

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Originally Posted by Souschef I prepare taxes for elderly and low income people through the AARP/IRS program. Out of all the ones I have done this tax season, only one did not have to file. I am assuming I have a biased sample, that the ones that do not owe anything do not come in to have their taxes done.

Just curious, how you assist others with their tax. Do you use software (ie TT) or do it manually? Do you receive special training? Are there security issues? Is there a income level that you can not assist? How is this determined.

[youbet]

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Originally Posted by GrayHare The IRMAA tiers are changing come 2018, which will be based on 2016 tax filings, however the impact will be to increase IRMAA. Big change coming soon for high income Medicare beneficiaries

Thanks GrayHare. I had heard something was coming in regard to IRMAA beyond just the adverse effects of no inflation adjustment.

Quote:

Higher Part B & D premiums for higher income beneficiaries In addition to steep increases in the standard Part B premium, Medicare beneficiaries with higher incomes will pay even more for their Part B and D premiums than they do today. Starting in 2018, individuals with annual incomes of $133,501 to $160,000 (for couples, annual income from$267,001 to $320,000) will pay 65% of program costs for their Part B and D premiums instead of the 50% they currently pay. Individuals with annual incomes of $160,001 and above (couples $320,001 and above) will pay 80% of program costs for their Part B and D premiums.

[MBSC]

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Originally Posted by youbet Thanks GrayHare. I had heard something was coming in regard to IRMAA beyond just the adverse effects of no inflation adjustment.

The inflation adjustment resumes after 2020.

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(c) Starting on January 1, 2020, the threshold amounts will resume adjustment for inflation as required by section 1839(i)(5) of the Act. In each year thereafter, CMS will set all modified adjusted gross income threshold amounts for the following year by increasing the preceding year's threshold amounts by any percentage increase in the Consumer Price Index rounded to the nearest $1,000. CMS will publish the amounts in the Federal Register in September of each year. Published threshold amounts will be effective January 1 of the next calendar year, for the full calendar year.

Source: https://www.ssa.gov/OP_Home/cfr20/418/418-1105.htm

[youbet]

Quote:

Originally Posted by daylatedollarshort I always liked this article from the WSJ on how to pay zero taxes on $150K in income, but it does include owning a real business: ROI: How to Avoid Paying Income Taxes - WSJ "If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool."

You know, I have two acquaintances who are involved in part time businesses in retirement (if you can still call it retirement if you're in business - another topic) and both claim to save a lot on taxes. One gives seminars to local government bodies on a topic concerning Fed Gov compliance. The other gives "expert testimony" regarding patent law suites.

It sure looks good from the outside. But I can't think of anything I could do that wouldn't involve risk to invested assets, knowledge/skills I'd have to acquire, time spent doing things I don't want to do or require a geographic move.

A retirement business sure seems to work out well for some folks though.

[Alan]

Quote:

Originally Posted by mickeyd Just curious, how you assist others with their tax. Do you use software (ie TT) or do it manually? Do you receive special training? Are there security issues? Is there a income level that you can not assist? How is this determined.

I have been a volunteer in the past with this program through AARP and the IRS. Official name is Volunteer Income Tax Assistance (VITA) and more info can be found here.

https://www.irs.gov/Individuals/Free...-by-Volunteers

I attended classes over a 6 week period then completed the IRS exam. The exam has to be taken each year.

The software used to assist in the preparation was Taxwise and the services were provided in a conference room in the local library using laptops provided by the program. The laptops are held by a senior member of the program.

[N02L84ER]

Quote:

Originally Posted by youbet Throw out a few of your best ideas for minimizing taxes in retirement........ In fact, anyone and everyone throw out their best ideas.

The best ideas are strategies that will reduce later taxable income - strategies to implement before applying for SS and years before RMD time. Per the article on increased Medicare premiums for high income individuals are these ideas of where to get nontaxable income.

"Distributions from a Roth individual retirement account or a health savings account are two examples of cash sources that are not included of the AGI and flow outside of the MAGI. Other sources of funds that may work as well for you are the cash value of life insurance or proceeds from a reverse mortgage."

So, after retiring and before SS (and RMD age), convert tax deferred monies to Roth IRAs. Fund HSAs when possible before Medicare age. These are the strategies I started using at age 53 and expect them to work well enough that I will not need to use LI or a reverse mortgage.

I believe at RMD age, using some or all of the RMD for direct to charity contributions will reduce taxes more than using schedule A.