Why Most Elderly Pay No Federal Tax

[youbet]

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]

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]

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]

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/artic...g-soon-for-high-income-medicare-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]

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]

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.

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]

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.

(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]

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]

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-Tax-Return-Preparation-for-You-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]

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.

 

[youbet]

So, after retiring and before SS (and RMD age), convert tax deferred monies to Roth IRAs. Fund HSAs when possible before Medicare age.

I did significant Roth converting although I did miss two years of opportunity before I woke up and got started. Never qualified for an HSA.

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 won't need a reverse mortgage either, or at least it's highly unlikely. Don't have much cash value in LI. A couple of old whole life policies (where the divs more than pay for the premium) and will just leave those sit for DW to use to get me planted, etc.

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.

Thanks for that reminder. When we start RMD's in 2017 I need to remember to restructure all charitable contributions so that they come directly from the RMD.

Thanks for your inputs!

 

[Souschef]

RMD to charity

Just a reminder that the distribution from the IRA must go directly to the charity. What I ran into with Invesco was i needed a medallion guarantee on the withdrawal because the check was going to a third party as payee.
The QCD makes a tremendous amount of sense when over 65 and MFJ, standard deduction is $15.000

 

[target2019]

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!

If you still pay real estate taxes, consider paying ahead. It could push you out of standard deduction territory.

I did pay ahead one quarter, in the past. It was something, but of course less RE taxes paid the next year, so a kind of wash on the two years Fed 1040's.

However, if retiring this year, and taxable income drops substantially in the next year, I believe it would work to a greater degree.

Of course, it would hurt on state taxes to some degree, as I would have less to deduct for state return.

 

[ziggy29]

If you still pay real estate taxes, consider paying ahead. It could push you out of standard deduction territory.

I did pay ahead one quarter, in the past. It was something, but of course less RE taxes paid the next year, so a kind of wash on the two years Fed 1040's.

However, if retiring this year, and taxable income drops substantially in the next year, I believe it would work to a greater degree.

Of course, it would hurt on state taxes to some degree, as I would have less to deduct for state return.

When I had both a mortgage and property taxes, this is what I did. One year I would have 11 mortgage payments and no property tax payments, and took the standard deduction. The other year I would make 13 mortgage payments, two property tax payments, and itemize.

 

[AllDone]

I volunteer for the VITA program too. It's really fun, if you enjoy talking to people and entering data in computers. It requires a little more brain power than most volunteer activities which is nice. You can volunteer through AARP, if you're interested. Training is in January.

 

[Souschef]

I volunteer for the VITA program too. It's really fun, if you enjoy talking to people and entering data in computers. It requires a little more brain power than most volunteer activities which is nice. You can volunteer through AARP, if you're interested. Training is in January.

I also do the same. The people are so grateful for the help.

 

[Car-Guy]

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!

Yes it's still good (actually great) to be retired however, after being in the top tax bracket for so many years while I was working and of course paying the max into social security and the seemingly "never ending" medicare tax, I was looking forward to enjoying some of the benefits that I was forced to pay into all those years. Now that I'm retired, 85% of my social security payments are being taxed and I'm paying triple the base monthly premium cost for medicare.

I should be allowed to deduct these "added" cost as charitable contributions.

 

[Johnora]

Very good thread...

So two stories, My wife's parents live with us and I do their taxes every year and they pay no taxes, so every year everything that has been withheld from them comes back to them in a nice check. The reason this occurs is because they have very, very little income, a trade off I do not want. No planning, little income.

My DW and I are both retiring soon, me in 2017, her in 2020, with virtually no debt and a retirement spent in the 25% tax bracket. I can complain about the taxes but I most certainly do not want the trade off. One of our greatest motivator's was seeing how tough life has been on my DW parents with very low income and we made sure we planned the SH*T out of our finances for the last 15 years so we can write a different ending to our story. So in essence, bring on the taxes, it means we did something right!

 

[Independent]

Although I understand the principle, I've never looked at actual numbers.

It turns out that a married couple, with $36,000 of Social Security income plus $20,100 of ordinary income (pension, IRA withdrawals, taxable interest) for $56,100 of total income would pay only $5 of FIT.

Contrast that to a working couple with $56,100 of earned income. They would pay $4,393 of FIT. In addition, the "employee share" of FICA would be $4,292.

Putting it another way, the working couple would need $67,300 of earnings to generate $56,100 of after tax income.


Since most of the tax advantage comes from the SS treatment, this is very sensitive to the SS benefit. Here are some more examples.

...SS....	...Reg....	..Total....	Over65...	Workers	..FICA..
36,000	20,100	56,100	5	4,393	4,292
32,000	20,700	52,700	0	3,883	4,032
28,000	21,400	49,400	0	3,388	3,779
24,000	22,100	46,100	5	2,893	3,527
20,000	22,700	42,700	0	2,383	3,267
16,000	23,100	39,100	0	1,847	2,991
12,000	23,100	35,100	0	1,447	2,685

 

[scrabbler1]

I have been looking at the idea of "bunching" my itemized deductions so I could take the standard deduction in the years I was able to move some flexible deductions out of the SD years. The main deduction I was able to move from one calendar year into another was the large 4th quarter state estimated tax payment. I could pay it in late December or early January, so in some years I would make two payments while in other years I would pay zero.


I probably won't be able to do this going forward, though, because my OOP medical expenses will rise enough to enable me to itemize every year. [I had some medical issues in 2015 which require some extra doctor visits and drugs (copays).] These expenses aren't huge but are just enough to keep me itemizing my deductions even if I to bunch them using the state estimated tax payments.]