You may very well know this already, but I’m posting for general population (I should have just not replied to @fallgirl - oh well)
Tax situation as a single person is different than married, and if you have to take a large RMD you may have to pay more taxes as a single person than you did as a married person.
Thinking as I type, if feasible, it might be worth doing a Roth conversion the last year you can claim married, if you have any need/desire to do so.
I would go a step further, and say that it is worth considering Roth conversions while both spouses are alive, especially if the couple has a large IRA balance.
The other tax ‘issue’ that YouDon’tSay may want to consider is capital gains implications of selling your home. I’m going off the top of my head here, but I believe if the surviving spouse sells within two years of the death of her spouse, the surviving spouse will enjoy the full $500,000 capital gains exemption plus the step up in basis on half of the property.
If the surviving spouse sells more than two years after the spouse’s death, the surviving spouse will calculate the capital gains exemption using the stepped up basis on half of the property plus a $250,000 exemption plus the original basis for the surviving spouse’s half of the property.
I’m sure someone can do a better job of explaining this with more accurate terms, so I will use numbers. Assume house cost $100K at purchase, and for argument sake let’s assume no improvements to the property. House is worth $1 million at death of first spouse, so the basis becomes half of $1 million or $500K + half of $100K or $50K. Again will assume no expenses associated with selling such as real estate commission. Basis is now $550K. If surviving spouse sells within two years of death, no capital gains tax owed b/c the $500K exemption wipes out the gain. If surviving spouse sells more than two years later, $550K basis + $250K single exemption means that capital gains taxes will be due on the $200,000 gain.
In reality, capital improvements performed while owning property will add to basis as will RE agent commission when selling, so not a perfect example but I am trying to keep it simple.
Community property states are entirely different and I know nothing about them.
Dh and I have talked about that, and that’s one reason that we continue to convert to the top of 12% and pay the taxes out of cash, even though it means being less liquid than we’d like to be. Still fine, but we know that the money spent now will benefit us or our kids in the long run. But, yeah, that’s the kind of reminder I need. I almost bailed on the Roth conversion last month, but I’d forgotten the calculus around one spouse dying. That is an important point. Gracias.
Community property states get full step up of basis for community owned assets…
I thought that was the case, but didn’t want to write something that I was not sure of. Thanks for the confirmation!
Not just referencing your comment, but it reminded me that I don’t understand the general concern with edging into the next tax bracket. The taxes are graduated, so you are only paying the higher tax on the portion that gets you into the next bracket. That amount is likely minimal. If it’s not minimal, there is less you can do to get your taxes down.
With the added caveat that converting into the 32% bracket assumes that one will be in the 32% during the RMD years.
Tax deferred accounts were set up with the assumption retirees would be in a lower tax bracket than in their working years. If that turns out not to be the case, nothing has been lost, just paying the taxes owed. I think too much time and effort is expended on trying to avoid paying taxes. Being in the 32% marginal tax bracket is an excellent “problem” to have.
In addition to possibly higher taxes when one spouse dies, it’s likely for higher income individuals that IRMAA will kick in and higher Medicare contributions will also have to be paid.
Paying in the 32% tax bracket on 100K instead of 24% generates an additional 8K on that part of our income, so that is unappealing, even though it’s just for that portion. Paying 7% in HELOC interest is less and tax deductible. Debt sucks, and so does too much income tax.
We face the same dilemma. We’re doing Roth conversions and harvesting capital gains with an eye on the 24% to 32% breakpoint, while also watching out for IIRMA cliffs and the Net Investment Income Tax.
Juggling it all is headache inducing.
We pay little attention to taxes. Planning for them is one of the ongoing benefits of our FA and CPA, but we aren’t doing any gymnastics to pay the very least amount possible. We owe them, we pay them. Taxes aren’t going to bankrupt us. Meh.
I also don’t do too many gyrations to avoid taxes, but sometimes there’s just dumb stuff that I’ve done that smacks me in the face after the fact, which I try to avoid. Funny, we used to pay 39.6% on the top part of our income, along with Obamacare penalties, Medicare tax and union dues, totaling about 45%, and I never thought twice about that. Now that I’m retired, I think about 32% tax rate and day, “No way!”
We have ACA subsidies to worry about right now, so the rates are impacted by that. Trying to thread the needle with ROTH conversions to be above the level were S31 would need to be on Medi-CAL, but by as little as possible. That feels like the right balance between running 500 simulations about future tax rates and investment returns and not doing anything.
and don’t forget, the ‘no taxes on Social secuirty’ pledge, which really becomes the new Senior deduction that starts phasing out at $150k (MFJ), so every dollar above $150k loses $0.12. Thus, a 22% bracket effectively jumps to 34% up to $206 AGI, and 36% above $206k, up to $250k, where the deduction is eliminated and tax bracket returns to 24%.
I am a bit confused on how long term capital gains are taxed. It is included in the AGI, right? If all your earnings are long term capital gains, how is it taxed? Does the tax bracket still apply? TurboTax does mine and I know I am supposed to use Tax Table but I’d like to know what my marginal rate is.
If you have no earnings other than LTCG, you will pay 0% up to $49,450 single or $98,900 MFJ.
And only available through the end of 2028, while the $40K SALT limit ends in 2029. Such a mess with the different.implementation and expiration dates of these changes
P.S. If you use the desktop version of TT, the Forms section is the coolest thing. Well, that is probably an overstatement but very helpful. You just click where it says Forms, and the page you are working on pivots to the worksheet so that you can see some of the steps.
FallGirl, I’m glad you brought this up. I also read a lot of finance boards and this is not mentioned enough. It is one thing to plan for retirement for two — and a whole different game after the death of one of the spouses.
I’m spending more for one than I had estimated we would pay for two of us. On the one hand, I am traveling a great deal (and more than he wanted to). On the other hand, I’m paying more for things around the house — repairs and yard work.
Any I’m trying to help the kids more whether it’s treats, or plane tickets to see me, and other things that make their lives easier.
When we (my CPA — another expense!) do the 2025 taxes, I’ll have a new understanding of paying taxes single rather than jointly. That’s the next mental exercise I’m expecting to deal with.
I don’t know if you have any interest in learning how to file your own taxes, but if you do, you could retain the CPA to file this year’s taxes, but also purchase TurboTax and see if you could produce the same bottom line that the CPA does. This is an admitted waste of $50 for TurboTax this year, but it might give you the confidence to file your own taxes going forward.