State tax breaks for age -- but we're different ages

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Topic Author
Statch
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State tax breaks for age -- but we're different ages

Post by Statch »

I am 55 and retiring at the end of the year. I will have a federal pension. My husband is 60, and already not working but will not start getting retirement income until (if) he takes SS at age 62. At that time we'll be living in a state (Georgia) that allows taxpayers between 62 and 64 to exclude up to $35,000 of most types of income, and $65,000 after age 65. We file as married/joint.

When my husband turns 62, I'm assuming that it's just his income (SS + IRA if he chooses to take some) that gets sheltered up to $35,000, not my pension (though that would be great :happy), right? (For example, if he made $15,000, and my pension took us over $35,000 jointly, we wouldn't be able to exclude the first $20,000 of my pension, right?) How would withdrawals or dividends/interest from our jointly owned taxable accounts get handled?

I apologize if the answer to this is obvious. I'm not having much luck googling it, and we do our own taxes so there's no one to ask.

Statch
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Electron
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Re: State tax breaks for age -- but we're different ages

Post by Electron »

I'd suggest downloading tax forms and instructions and see how they handle your case.

http://www.statetaxinformation.com/indStates/Georgia/
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Bob's not my name
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Re: State tax breaks for age -- but we're different ages

Post by Bob's not my name »

I'm not a GA taxpayer but a quick look at the form and instructions (which you must also have done) indicates it's per person. Did you reach a different conclusion?

I imagine that since you can live off of your taxable assets and your pension it would be best if he took no early SS or IRA distributions and instead used the exclusion for eight or more years to convert maybe $400,000 of his IRA to a Roth IRA at no state tax cost. But it depends on what that does to your federal tax burden.

I guess you might also move taxable assets into his name only so he can use the exclusion to shelter investment income from your taxable assets. There's a pretty big opportunity there for long term gains and qualified dividends that are entirely free of state and federal tax (if you stay under the 25% bracket).
Last edited by Bob's not my name on Mon Jul 22, 2013 3:01 pm, edited 1 time in total.
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Peter Foley
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Re: State tax breaks for age -- but we're different ages

Post by Peter Foley »

This will not answer your questions regarding Georgia State Income taxes, but it may prove useful with regard to your Federal tax situation.

You have a little time to prepare for this so from a Federal tax perspective I would advise the following:

If you are reinvesting dividends, stop doing so now. The result will be that a year from now any gains in your taxable account will be long term captal gains.
Based on the information you have provided, you will have about $20,000 in pension when you are both retired, you will be well under the top of the 15% tax bracket ($72,500 in 2013). At that point withdrawals from your taxable account, including a lot of capital gains will be tax free federally. In planning ahead for 2015, taking some long term capital gains in late 2014 will give you a lot a cushion in your taxable account for 2015 so that your withdrawals from taxable in 2015 will be tax free as well.
Note: You will pay taxes on any interest income in 2015, but with current interest rates this is not likely to amount to much unless the bond portion of your taxable portfolio is well over seven figures.

Edit: It appears that the starting point for Georgia State Income tax is the Federal Adjusted Gross (line 8 of Georgia Form 500). I believe that means that any long term capital gains have already been accounted for.
Last edited by Peter Foley on Mon Jul 22, 2013 3:05 pm, edited 1 time in total.
Bob's not my name
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Re: State tax breaks for age -- but we're different ages

Post by Bob's not my name »

Peter Foley wrote:Based on the information you have provided, you will have about $20,000 in pension when you are both retired
I thought that's what she said, too, but read it again.
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Peter Foley
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Re: State tax breaks for age -- but we're different ages

Post by Peter Foley »

Hi Bob's not my name

Do you think the husband is working part time? I understood his $15,000 to be from SS or IRA withdrawal. I admit it is not entirely clear.
Bob's not my name
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Re: State tax breaks for age -- but we're different ages

Post by Bob's not my name »

Agreed on that, but:
Statch wrote:For example, if he made $15,000, and my pension took us over $35,000 jointly, we wouldn't be able to exclude the first $20,000 of my pension, right?
She doesn't say her pension is $20,000, she says it's over $20,000 -- the $20,000 is relevant only as the amount of headroom in his exclusion, and only as an illustration in the hypothetical scenario in which he has $15,000 of SS/IRA withdrawals, and she doesn't take investment income into account in this hypothetical scenario. We don't know how large her pension is or how much investment income they'll have.

There is tremendous opportunity here for federal and state tax mitigation, but only she can work out the optimal strategy -- unless she wants to share all the numbers.
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Statch
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Re: State tax breaks for age -- but we're different ages

Post by Statch »

Sorry, I had to step away from the computer for a few minutes -- you all are fast!

I feel silly for missing this line in the instructions, which does answer the question about our joint taxable account's income:

" If any item is held jointly, the income or loss should be allocated to each taxpayer at 50%."

But I'm so glad I asked the question anyway, because your answers have really given me some food for thought (and the feeling that we really need to consult a tax expert this time). My example was just an example; my actual pension income will be higher, but I think our overall income will be below the cutoff for 15% so I definitely need to think all this through. My husband will have no income other than what he chooses to take from SS or his IRA (or his share of our taxable accounts). I believe we will be able to live on my pension and some cash we've set aside to get us through the first five years (to let the investments ride as long as possible before we start withdrawing), so we have time to work this out.

My husband has always done the taxes, which have been simple up to now, and I've always done the investments, which I've also kept simple, but now that the two are coinciding, he wants me to do the planning, since he thinks it will be easier for me to understand the taxes than for him to understand the investing (I don't agree :happy but I'm going to try. ) It sounds like it would really be in our best interests to consult a tax expert as we do this planning. I hadn't realized the extent of the opportunities to make this come out to our benefit.

Thanks so much for the responses!
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Re: State tax breaks for age -- but we're different ages

Post by Bob's not my name »

Good thinking, but be warned that "tax experts" are often expert only at preparing your return, not so much at doing a multi-variable optimization for eight future years such as you have here with the 0% federal rate on LTCG/QD, Roth conversions, deferral of SS, and the GA exclusion.
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Statch
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Re: State tax breaks for age -- but we're different ages

Post by Statch »

Bob's not my name, thanks for the warning. I had been sitting here thinking also that if I go to someone here in Maryland with my questions, not only will s/he not be an expert in GA tax law -- which won't matter this year but will matter for longer-term advice -- but s/he will also realize that I'll be a short-term customer, since we're moving in 6 months. And then we'd need to establish a new relationship with someone else when we move....and of course, I really need to already know the answers -- or at least the questions -- in order to be able to evaluate the advice. Same issues I've been running into when thinking about maybe using a financial advisor.

Because I'm so unfamiliar with taxes, I really need to sit down and work through mock federal/state tax returns for next year and make sure I understand the tax consequences of each type of account so that I can ask informed questions here and not waste people's time. (I do NOT have a math brain :( . This stuff is really hard for me.) Thank goodness for this forum -- I read it almost everyday. I see issues constantly that I hadn't thought of before, and it's so nice of all the knowledgeable people to spend their time helping the rest of us.

Statch
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Peter Foley
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Re: State tax breaks for age -- but we're different ages

Post by Peter Foley »

My approach to entering the withdrawal stage was to create a 5 year plan. I start with my defined pension and then look at each year to identify my potential sources of income and potential Roth conversions. My goal is to convert a fair amount of our deferred income to Roth before I take SS, while all the time remaining in the 15% tax bracket. I'm in my first full year of the plan. I converted my IRA to a Roth in 2013.

Here's an example of the plan: Year 2014

2014: Assumption - Wife retired no income, Me pension + rental net income
Adjusted Gross Income = $40,000 + $6,000 = $46,000 + QDIV $4000 = $50,000
2013 Tax rate schedule >72,500 = 25% < 142,700
Action: Partial conversion of Wife's IRA to Roth = additional $40,000 income [Net AGI = $90,000- exempt. & deds. of 25k = Taxable income of $65,000]
Withdrawal of $40,000 from taxable for spendable income of $90,000. (No equity sales necessary, no long term capital gains)
Optional - cash EE savings bond adds additional $3000 to taxable income.
Topic Author
Statch
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Re: State tax breaks for age -- but we're different ages

Post by Statch »

Great idea on the 5-year plan. I've set aside cash so that we don't need to withdraw from investments for 5 years (while we figure out what our true expenses are, then hopefully some of that can be returned to investments), but I really need to sit down and learn about this/plan it out in case it would be advantageous in terms of taxes to do it a different way, and so that I'm preparing for the future. Our tax-advantaged accounts are my Roth, my husband's traditional IRA, and my federal TSP (which is fully traditional, no Roth). My husband's trad IRA and my TSP would be usable immediately, but we'd have to wait on my Roth until I turn 591/2. I'd read that the best thing to do is take from taxable accounts first and let the tax-advantaged accounts ride, and our investments are about just about evenly divided between taxable and tax-advantaged.
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archbish99
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Re: State tax breaks for age -- but we're different ages

Post by archbish99 »

Yes, but it looks like you've got several prime years for a Roth conversion here. I'd start approaching this as how much you can convert each year without getting out of the Federal 15% bracket. The exclusion means you should probably convert enough for each of you to fully use the exclusion on your state taxes each year, which means starting with conversions for your husband, then starting on yours one you get an exclusion yourself.

With the age difference, particularly if your husband was the higher earner, you should probably plan on him waiting to collect SS on his own account until age 70. You can claim at 62, and he can file a restricted application to collect as your spouse for a few years until age 70. That's likely to give you the most lifetime income as a couple, and maximizes the amount for whichever of you outlives the other. Plus it gives you more time for Roth conversions.

Edit: The federal pension may complicate that SS advice if it's from CSRS; FERS is fine. I think the strategy above still makes sense pretty much regardless, though of course your pension will reduce how much you can convert each year because you'll have income you can't time.
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Topic Author
Statch
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Re: State tax breaks for age -- but we're different ages

Post by Statch »

Thanks very much, archbish99. Unfortunately the federal pension does complicate it because it is CSRS (actually CSRS-offset, so I will collect SS but it will be offset from my pension). I'm the higher earner -- my husband has been a stay-at-home husband for years, which is how he has that traditional IRA -- and the federal GPO/WEP restrictions both apply. I went through a retirement seminar at work a while back where they talked about the Roth conversions for the TSP, and I remember that it looked like it wouldn't work for me; I'll have to look at my notes from that again to recall why that was and post it here in case it's useful for someone else (and also just in case I misunderstood and it would help us!). I definitely need to look at the Roth conversions for my husband's traditional IRA, though.
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frugaltype
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Re: State tax breaks for age -- but we're different ages

Post by frugaltype »

Bob's not my name wrote: I guess you might also move taxable assets into his name only so he can use the exclusion to shelter investment income from your taxable assets.
I'm kind of paranoid about divorce possibilities.
Topic Author
Statch
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Re: State tax breaks for age -- but we're different ages

Post by Statch »

I looked up the comment I was thinking of from the retirement seminar about doing a back-door Roth from TSP: the guy was talking about doing that via the voluntary contribution program, which I can't do because I owe a redeposit (long story - I've had the redeposit calculated several times and it's not worth it to pay it back). Now I need to decipher my notes on doing it from the TSP itself.

I'm going to think about the issue of converting taxable assets to my husband's ownership. (We've been married 28 years and I think we're good :happy but of course one never really knows what's going to happen! How many people have thought they were safe from divorce and gotten blindsided...)
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archbish99
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Re: State tax breaks for age -- but we're different ages

Post by archbish99 »

Statch wrote:I'm going to think about the issue of converting taxable assets to my husband's ownership. (We've been married 28 years and I think we're good :happy but of course one never really knows what's going to happen! How many people have thought they were safe from divorce and gotten blindsided...)
One technique I've seen proposed is basically dividing community assets into separate assets. So you'd retitle $10k of joint assets into his name and $10k of joint assets into your name. Of course, if they're still invested in the same thing, the tax ramifications are the same as if you still held them jointly, so there's probably not much point.

Now, if he's selling his assets to live on while you're holding yours to defer the taxes, it becomes a question of how you're compensating him for that... :wink: Or maybe he's repaying the years you've supported him!
I'm not a financial advisor, I just play one on the Internet.
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Watty
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Re: State tax breaks for age -- but we're different ages

Post by Watty »

If you have tax software that includes your state taxes you can make up dummy tax return to see how the taxes work out. It will be using last year's tax laws so there may be some difference that you will need to watch out for but that will be a good check to see if you missed something or at an income level where various income phase-outs occur.

This will also help you see how your social security will be taxed.
http://www.bogleheads.org/wiki/Taxation ... y_benefits

Also check your county property tax rules. A few counties here in Georgia give extra property tax exemptions to seniors over the age of 62 but you have to apply for them by a certain date.
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