I think my Mom, recently widowed, is looking at a tax bomb

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

This is an extension of sorts from a thread I made earlier in the month over in 'Personal Finance': viewtopic.php?t=425871&start=50 - I figured this question is specific enough to investing that it required its own thread in 'Personal Investments'; but mods please let me know otherwise.

In short, I'm looking for a sanity check to assert that I'm indeed correct that a tax-bomb is waiting for my mom now that she is a widow and, if so, did I correctly cover the options available to her to that minimize impact.

Some facts:
  • Dad died last month. He was retired and would have been 70 later this year (in September)
  • Mom, the survivor, is retired and is turning 75 later this year (in May)
  • Mom has a managed Rollover IRA @ ~$75k. She is taking RMDs.
  • Dad has a managed Rollover IRA (Mom is beneficiary) @ ~$170k. He was not taking RMDs.
  • Dad has a 401k w/ his employer @ ~$900k (Mom is beneficiary). He was not taking RMDs.
  • Mom & Dad have a Joint Taxable Brokerage Account @ ~$130k.
  • Mom has a pension structured as an annuity. She'll get ~$2.5k a year until she dies.
  • They had been filing taxes as Married/Jointly. Current tax bracket is 10%.
  • Mom and Dad were getting ~$61k in social security. That will now go down to ~$33k a year.
  • They have been living off SS since retirement and never tapped into savings. They have paid nothing in federal taxes for the last couple of years.
  • Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
  • She will likely be selling her home during this time (~$300k)
  • No life or long-term care insurance. Just Medicare w/ Medigap and prescription.
  • Mom is a veteran, but unfortunately doesn't qualify as a wartime veteran
  • Added since original post: Me and my 2 siblings are contingent beneficiaries of equal payout on all of my Dad's accounts.
Please let me know if there are some other facts I'm missing that could change the calculus.

After reading IRS articles, Boglehead posts, and watching lectures, I'm starting to realize that there may be a major tax bomb waiting for my mom. Since she's already taking RMDs, once she gets my Dad's assets she'll need to take RMDs on those. In addition, come 2026, there is a good chance the tax brackets will shift out of favor. So in the next 2-3 years she'll be going from the 10% bracket to the 25% or 28% brackets.

I was able to come up w/ the following options for her:
  • If she treats Dad's assets as inherited, she can delay RMDs on those assets until 2027 which she'll have to start taking Beneficiary RMDs (Single Lifetime Table). She'll go from 10% (2024, 2025, 2026) to 28% (2027) at that point
  • She has the option to treat Dad's assets as inherited until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
  • If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
Last edited by trilobyte on Tue Mar 26, 2024 6:30 pm, edited 1 time in total.
User avatar
retired@50
Posts: 13094
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by retired@50 »

trilobyte wrote: Tue Mar 26, 2024 3:17 pm
Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
It's possible she'll be eligible for medical expense deductions if she needs assistance with 2 or more activities of daily living. ADLs.

My FIL had 6 figures of medical expense deductions for several years. The money to pay those huge costs was taken from an IRA (seen as ordinary income) and then those expenses were promptly deducted on his Form 1040 which reduced his income dramatically. He wound up in a low tax bracket.

More details here: https://www.irs.gov/taxtopics/tc502
and here: https://www.elderlawanswers.com/tax-ded ... costs-7184

Regards,
Last edited by retired@50 on Tue Mar 26, 2024 3:29 pm, edited 2 times in total.
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Jack FFR1846
Posts: 18589
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Jack FFR1846 »

I would think that with 2024 and 2025 being the last of the low tax years....
and your mom for tax year 2024 filing a joint tax return....
She would want to Roth convert up to just below the IRMAA limit. I don't know how the limit works when your spouse passes. If she can still consider 2024 to be MFJ for Medicare, then that's like $200k. Trying to stay in the 10% bracket is sort of silly in my opinion.
Bogle: Smart Beta is stupid
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

Jack FFR1846 wrote: Tue Mar 26, 2024 3:28 pm I would think that with 2024 and 2025 being the last of the low tax years....
and your mom for tax year 2024 filing a joint tax return....
She would want to Roth convert up to just below the IRMAA limit. I don't know how the limit works when your spouse passes. If she can still consider 2024 to be MFJ for Medicare, then that's like $200k. Trying to stay in the 10% bracket is sort of silly in my opinion.
I think you're saying to take option 3, and then for how much to take: take the RMDs, then Roth convert the rest up to the IRMAA limit? I think IRMAA is based on filing status and a 2 year delay. So under $200k for joint filers.
retired@50 wrote: Tue Mar 26, 2024 3:25 pm It's possible she'll be eligible for medical expense deductions if she needs assistance with 2 or more activities of daily living. ADLs.

My FIL had 6 figures of medical expense deductions for several years. The money to pay those huge costs was taken from an IRA (seen as ordinary income) and then those expenses were promptly deducted on his Form 1040 which reduced his income dramatically. He wound up in a low tax bracket.

More details here: https://www.irs.gov/taxtopics/tc502
and here: https://www.elderlawanswers.com/tax-ded ... costs-7184

Regards,
Thank you! That was something I didn't realize - I'd have to run the math but that might greatly reduce things; hoping it at least keeps her under IRMAA for the years she needs to spend on that care
Grebely
Posts: 22
Joined: Fri Feb 19, 2021 1:33 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Grebely »

I looked at your other thread also. Sorry for your loss as well as the strain of caregiving. From your personal financial perspective, I advise you to prioritize your relationship with your wife. Do not let this period of hardship destroy your marriage. Even if this requires tough decisions/ conflict with your mother.

On your tax question, I agree with your advisors that the retirement accounts should just all be simplified into your mother’s name, even if RMDs are a bit higher.

A really good reason not to worry about large RMDs is that assisted living/ home health/ nursing home costs are deductible as medical expenses. So taxable income is likely to be modest. You will likely want her to pull MORE from the IRAs than the RMDs. It is tax-smart for her to use IRA monies for deductible medical expenses. (And likely also better for her heirs, unless her estate is going to charity)

Best wishes to you on your caregiving journey.
Carl53
Posts: 2711
Joined: Sun Mar 07, 2010 7:26 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Carl53 »

With the likelihood of sizeable deductible LTC expenses in a few years, I could see filling up at least the 12% bracket this year (MFJ) and possibly future years with conversions. Not sure I'd do more than this if Mom might live upwards of ten years. This year she will have a bigger deduction and a reduced SS benefit. Thus she will have room above the point where 85% of the SS is taxed in the 12% bracket. In future years it will be more problematic as she files single.
Leesbro63
Posts: 10827
Joined: Mon Nov 08, 2010 3:36 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Leesbro63 »

Jack FFR1846 wrote: Tue Mar 26, 2024 3:28 pm I would think that with 2024 and 2025 being the last of the low tax years....
and your mom for tax year 2024 filing a joint tax return....
She would want to Roth convert up to just below the IRMAA limit. I don't know how the limit works when your spouse passes. If she can still consider 2024 to be MFJ for Medicare, then that's like $200k. Trying to stay in the 10% bracket is sort of silly in my opinion.
I was involved in something similar. The widow got an IRMAA exemption for the one year when the husband died and she converted a biggish traditional Ira to a Roth (same year as husband's death/still filing jointly). It all played out the following year when the big IRMAA notice came. Used form SSA-44. Death of a spouse is an acceptable IRMAA wavier thing if a big income year is related to the death of a spouse.
Last edited by Leesbro63 on Wed Mar 27, 2024 4:24 am, edited 1 time in total.
Navillus1968
Posts: 996
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Navillus1968 »

trilobyte wrote: Tue Mar 26, 2024 3:17 pm This is an extension of sorts from a thread I made earlier in the month over in 'Personal Finance': viewtopic.php?t=425871&start=50 - I figured this question is specific enough to investing that it required its own thread in 'Personal Investments'; but mods please let me know otherwise.

In short, I'm looking for a sanity check to assert that I'm indeed correct that a tax-bomb is waiting for my mom now that she is a widow and, if so, did I correctly cover the options available to her to that minimize impact.

Some facts:
  • Dad died last month. He was retired and would have been 70 later this year (in September)
  • Mom, the survivor, is retired and is turning 75 later this year (in May)
  • Mom has a managed Rollover IRA @ ~$75k. She is taking RMDs.
  • Dad has a managed Rollover IRA (Mom is beneficiary) @ ~$170k. He was not taking RMDs.
  • Dad has a 401k w/ his employer @ ~$900k (Mom is beneficiary). He was not taking RMDs.
  • Mom & Dad have a Joint Taxable Brokerage Account @ ~$130k.
  • Mom has a pension structured as an annuity. She'll get ~$2.5k a year until she dies.
  • They had been filing taxes as Married/Jointly. Current tax bracket is 10%.
  • Mom and Dad were getting ~$61k in social security. That will now go down to ~$33k a year.
  • They have been living off SS since retirement and never tapped into savings. They have paid nothing in federal taxes for the last couple of years.
  • Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
  • She will likely be selling her home during this time (~$300k)
  • No life or long-term care insurance. Just Medicare w/ Medigap and prescription.
  • Mom is a veteran, but unfortunately doesn't qualify as a wartime veteran
Please let me know if there are some other facts I'm missing that could change the calculus.

After reading IRS articles, Boglehead posts, and watching lectures, I'm starting to realize that there may be a major tax bomb waiting for my mom. Since she's already taking RMDs, once she gets my Dad's assets she'll need to take RMDs on those. In addition, come 2026, there is a good chance the tax brackets will shift out of favor. So in the next 2-3 years she'll be going from the 10% bracket to the 25% or 28% brackets.

I was able to come up w/ the following options for her:
  • If she does nothing w/ Dad's assets, she can delay RMDs on those assets until 2027 which she'll have to start taking Beneficiary RMDs (Single Lifetime Table). She'll go from 10% (2024, 2025, 2026) to 28% (2027) at that point
I think by "do nothing" you actually mean set up inherited IRAs for your Dad's IRA & 401k, yes? Then wait to take RMDs in the year dad would have turned 73, 2027, yes? Make sure mom designates a beneficiary in her inherited IRAs!
[*]She has the option to do nothing w/ Dad's assets until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
To repeat, this means set up inherited IRAs for your Dad's IRA & 401k, then in the year before dad was to turn 73, your mom assumes ownership of both inherited IRAs by doing rollovers into her IRA or re-titling the inherited IRAs as her own?
[*]If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
[/list]
This option is clearly not optimal- why incur RMDs before you have to? Option 2 is the best option, because it provides the greatest flexiblity in spending. Remember, your mom can still withdraw from her inherited IRAs prior to 2027, so if she needs funds, they are available.

Also it's legal for mom to rollover her 2 inherited IRAs to a single inherited IRA, as long as she does a trustee-to-trustee transfer from the same deceased IRA owner with herself as sole beneficiary. This simplifies RMD calculations & lessens the chance for error. In 3 tax years (2026) she can assume that IRA as her own & use the favorable Uniform Lifetime Table instead of the Single Life Table for RMDs.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
Are you the contingent beneficiary on either of your dad's tax-deferred accounts?
Your mom could disclaim a large portion of the the $900k 401k, which would pass to you in an inherited IRA. You would then have 10 years in which to empty your inherited IRA. [ETA-] If Because you are married, the MFJ brackets would help you absorb the extra income & your mom's eventual RMDs from that account would be much smaller.

As a rough example- If she disclaimed $600k, you would have roughly $60k extra income per year for 10 years. Mom's RMDs from that IRA would be 1/3 the size they would be had she not disclaimed the $600k. If you are in the 32% tax bracket or higher, this option loses some luster, of course.

If mom needed funds, you can gift her [ETA ]$17k/year ($34k - If Because you are MFJ), plus you can pay mom's medical bills directly to the provider hospital/insurance company/etc. without reducing your lifetime gift exemption or running afoul of the annual gift tax exclusion.
https://farmoffice.osu.edu/blog/tue-112 ... ting-rules

Since 2024 is mom's last year filing MFJ, she should look assuming a portion of dad's IRA in to her own IRA & Roth converting into the 22% bracket, maybe the 24%. Make a note to file SSA-44 Form with medicare for an IRMAA appeal in 2026. Death of a spouse if a life-changing event, such that her 2024 income won't be used to calculate 2026 IRMAA.
rkhusky
Posts: 17992
Joined: Thu Aug 18, 2011 8:09 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by rkhusky »

With taxation of SS, it doesn’t take much to get into 22% marginal rate.

Might want to see how much you would need to convert to get below the band of 40% marginal rate. Or whether you will always be far above it.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

https://www.bogleheads.org/wiki/File:SS ... le2023.png
Last edited by rkhusky on Tue Mar 26, 2024 7:00 pm, edited 2 times in total.
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

Navillus1968 wrote: Tue Mar 26, 2024 4:44 pm I think by "do nothing" you actually mean set up inherited IRAs for your Dad's IRA & 401k, yes? Then wait to take RMDs in the year dad would have turned 73, 2027, yes? Make sure mom designates a beneficiary in her inherited IRAs!
She has the option to do nothing w/ Dad's assets until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
To repeat, this means set up inherited IRAs for your Dad's IRA & 401k, then in the year before dad was to turn 73, your mom assumes ownership of both inherited IRAs by doing rollovers into her IRA or re-titling the inherited IRAs as her own?
If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
This option is clearly not optimal- why incur RMDs before you have to? Option 2 is the best option, because it provides the greatest flexiblity in spending. Remember, your mom can still withdraw from her inherited IRAs prior to 2027, so if she needs funds, they are available.

Also it's legal for mom to rollover her 2 inherited IRAs to a single inherited IRA, as long as she does a trustee-to-trustee transfer from the same deceased IRA owner with herself as sole beneficiary. This simplifies RMD calculations & lessens the chance for error. In 3 tax years (2026) she can assume that IRA as her own & use the favorable Uniform Lifetime Table instead of the Single Life Table for RMDs.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
Are you the contingent beneficiary on either of your dad's tax-deferred accounts?
Your mom could disclaim a large portion of the the $900k 401k, which would pass to you in an inherited IRA. You would then have 10 years in which to empty your inherited IRA. [ETA-] If Because you are married, the MFJ brackets would help you absorb the extra income & your mom's eventual RMDs from that account would be much smaller.

As a rough example- If she disclaimed $600k, you would have roughly $60k extra income per year for 10 years. Mom's RMDs from that IRA would be 1/3 the size they would be had she not disclaimed the $600k. If you are in the 32% tax bracket or higher, this option loses some luster, of course.

If mom needed funds, you can gift her [ETA ]$17k/year ($34k - If Because you are MFJ), plus you can pay mom's medical bills directly to the provider hospital/insurance company/etc. without reducing your lifetime gift exemption or running afoul of the annual gift tax exclusion.
https://farmoffice.osu.edu/blog/tue-112 ... ting-rules

Since 2024 is mom's last year filing MFJ, she should look assuming a portion of dad's IRA in to her own IRA & Roth converting into the 22% bracket, maybe the 24%. Make a note to file SSA-44 Form with medicare for an IRMAA appeal in 2026. Death of a spouse if a life-changing event, such that her 2024 income won't be used to calculate 2026 IRMAA.
First, thank you for pointing out my inaccurate language :oops: Yes I didn't mean "do nothing" as literal - I meant get them into an inherited IRA; I've made that correction in my original post to help clear up confusion for others reading.

The disclaiming strategy is an interesting one. I am contingent, however so are my siblings. I should have mentioned that in my original post; I've updated my facts accordingly. I think this will only work if I completely trust my siblings who have an equal share (fyi, I don't trust them and neither does mom :mrgreen: ).
Navillus1968
Posts: 996
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Navillus1968 »

Normally, disclaiming to multiple contingent beneficiaries is ideal, because it distributes the distribution tax burden across more people. If your siblings can't be trusted to help mom out when she needs money, then the plan falls apart, obviously.

I think mom's best bet to reduce RMDs is to do Roth conversions in 2024 & 2025 using the TCJA brackets while they last to reduce the size of her tax-deferred accounts.
She definitely should keep a fair amount in her TIRA as a hedge against future medical bills, but a $1.15M TIRA (70+170+900) will generate about $69K of RMDs this year alone. I assume that is far in excess of her needs, absent any medical bills?
https://www.schwab.com/ira/ira-calculators/rmd

It's tough trying to set a target amount to keep in TIRA, since there are so many moving parts WRT mom's healthcare needs, lifespan, etc. I would convert in 2024 using all of the MFJ 22% bracket & maybe a part of the 24%. Next year, do the same thing, but Filing Single, so stop at taxable income of ~$125k or so.
That would likely leave a TIRA in the $700k-$800k range, enough to pay medical/healthcare bills with, but with reduced RMDs compared to $1.15M.
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

Navillus1968 wrote: Tue Mar 26, 2024 7:44 pm Normally, disclaiming to multiple contingent beneficiaries is ideal, because it distributes the distribution tax burden across more people. If your siblings can't be trusted to help mom out when she needs money, then the plan falls apart, obviously.

I think mom's best bet to reduce RMDs is to do Roth conversions in 2024 & 2025 using the TCJA brackets while they last to reduce the size of her tax-deferred accounts.
She definitely should keep a fair amount in her TIRA as a hedge against future medical bills, but a $1.15M TIRA (70+170+900) will generate about $69K of RMDs this year alone. I assume that is far in excess of her needs, absent any medical bills?
https://www.schwab.com/ira/ira-calculators/rmd

It's tough trying to set a target amount to keep in TIRA, since there are so many moving parts WRT mom's healthcare needs, lifespan, etc. I would convert in 2024 using all of the MFJ 22% bracket & maybe a part of the 24%. Next year, do the same thing, but Filing Single, so stop at taxable income of ~$125k or so.
That would likely leave a TIRA in the $700k-$800k range, enough to pay medical/healthcare bills with, but with reduced RMDs compared to $1.15M.
I think 1.15M would actually mean about $46k in RMDs for her, but I get your point. There is another option here to consider which is still do roth conversions beyond what is required for RMDs at least for years 2024 and 2025 (I think I ruled this out too quickly, so I never figured them in my calculations).
User avatar
White Coat Investor
Posts: 17527
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by White Coat Investor »

trilobyte wrote: Tue Mar 26, 2024 3:17 pm This is an extension of sorts from a thread I made earlier in the month over in 'Personal Finance': viewtopic.php?t=425871&start=50 - I figured this question is specific enough to investing that it required its own thread in 'Personal Investments'; but mods please let me know otherwise.

In short, I'm looking for a sanity check to assert that I'm indeed correct that a tax-bomb is waiting for my mom now that she is a widow and, if so, did I correctly cover the options available to her to that minimize impact.

Some facts:
  • Dad died last month. He was retired and would have been 70 later this year (in September)
  • Mom, the survivor, is retired and is turning 75 later this year (in May)
  • Mom has a managed Rollover IRA @ ~$75k. She is taking RMDs.
  • Dad has a managed Rollover IRA (Mom is beneficiary) @ ~$170k. He was not taking RMDs.
  • Dad has a 401k w/ his employer @ ~$900k (Mom is beneficiary). He was not taking RMDs.
  • Mom & Dad have a Joint Taxable Brokerage Account @ ~$130k.
  • Mom has a pension structured as an annuity. She'll get ~$2.5k a year until she dies.
  • They had been filing taxes as Married/Jointly. Current tax bracket is 10%.
  • Mom and Dad were getting ~$61k in social security. That will now go down to ~$33k a year.
  • They have been living off SS since retirement and never tapped into savings. They have paid nothing in federal taxes for the last couple of years.
  • Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
  • She will likely be selling her home during this time (~$300k)
  • No life or long-term care insurance. Just Medicare w/ Medigap and prescription.
  • Mom is a veteran, but unfortunately doesn't qualify as a wartime veteran
  • Added since original post: Me and my 2 siblings are contingent beneficiaries of equal payout on all of my Dad's accounts.
Please let me know if there are some other facts I'm missing that could change the calculus.

After reading IRS articles, Boglehead posts, and watching lectures, I'm starting to realize that there may be a major tax bomb waiting for my mom. Since she's already taking RMDs, once she gets my Dad's assets she'll need to take RMDs on those. In addition, come 2026, there is a good chance the tax brackets will shift out of favor. So in the next 2-3 years she'll be going from the 10% bracket to the 25% or 28% brackets.

I was able to come up w/ the following options for her:
  • If she treats Dad's assets as inherited, she can delay RMDs on those assets until 2027 which she'll have to start taking Beneficiary RMDs (Single Lifetime Table). She'll go from 10% (2024, 2025, 2026) to 28% (2027) at that point
  • She has the option to treat Dad's assets as inherited until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
  • If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
What tax bomb are you talking about? Your mom has $35K in SS and pension income and an IRA of just over a million. The RMD on that will be something like $40K to start. So $75K in income. How much tax do you think she'll owe on <$75K and why do you call it a "tax bomb"? I'd certainly rather have her pay tax on $75K then not have that million bucks. Calculate out the tax and I bet you'll feel differently about it.

Typical retirees are like typical students and typical military members. They don't really pay taxes in any significant way. Your mom is pretty typical as far as retirees go. She's barely into the 22% bracket. What's her effective tax rate going to be, 10-12%? Something like $8K maybe? Not sure how much effort I'd put in to try to lower it from $8K to $7K.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
Lee_WSP
Posts: 10476
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Lee_WSP »

White Coat Investor wrote: Tue Mar 26, 2024 8:35 pm
trilobyte wrote: Tue Mar 26, 2024 3:17 pm This is an extension of sorts from a thread I made earlier in the month over in 'Personal Finance': viewtopic.php?t=425871&start=50 - I figured this question is specific enough to investing that it required its own thread in 'Personal Investments'; but mods please let me know otherwise.

In short, I'm looking for a sanity check to assert that I'm indeed correct that a tax-bomb is waiting for my mom now that she is a widow and, if so, did I correctly cover the options available to her to that minimize impact.

Some facts:
  • Dad died last month. He was retired and would have been 70 later this year (in September)
  • Mom, the survivor, is retired and is turning 75 later this year (in May)
  • Mom has a managed Rollover IRA @ ~$75k. She is taking RMDs.
  • Dad has a managed Rollover IRA (Mom is beneficiary) @ ~$170k. He was not taking RMDs.
  • Dad has a 401k w/ his employer @ ~$900k (Mom is beneficiary). He was not taking RMDs.
  • Mom & Dad have a Joint Taxable Brokerage Account @ ~$130k.
  • Mom has a pension structured as an annuity. She'll get ~$2.5k a year until she dies.
  • They had been filing taxes as Married/Jointly. Current tax bracket is 10%.
  • Mom and Dad were getting ~$61k in social security. That will now go down to ~$33k a year.
  • They have been living off SS since retirement and never tapped into savings. They have paid nothing in federal taxes for the last couple of years.
  • Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
  • She will likely be selling her home during this time (~$300k)
  • No life or long-term care insurance. Just Medicare w/ Medigap and prescription.
  • Mom is a veteran, but unfortunately doesn't qualify as a wartime veteran
  • Added since original post: Me and my 2 siblings are contingent beneficiaries of equal payout on all of my Dad's accounts.
Please let me know if there are some other facts I'm missing that could change the calculus.

After reading IRS articles, Boglehead posts, and watching lectures, I'm starting to realize that there may be a major tax bomb waiting for my mom. Since she's already taking RMDs, once she gets my Dad's assets she'll need to take RMDs on those. In addition, come 2026, there is a good chance the tax brackets will shift out of favor. So in the next 2-3 years she'll be going from the 10% bracket to the 25% or 28% brackets.

I was able to come up w/ the following options for her:
  • If she treats Dad's assets as inherited, she can delay RMDs on those assets until 2027 which she'll have to start taking Beneficiary RMDs (Single Lifetime Table). She'll go from 10% (2024, 2025, 2026) to 28% (2027) at that point
  • She has the option to treat Dad's assets as inherited until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
  • If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
What tax bomb are you talking about? Your mom has $35K in SS and pension income and an IRA of just over a million. The RMD on that will be something like $40K to start. So $75K in income. How much tax do you think she'll owe on <$75K and why do you call it a "tax bomb"? I'd certainly rather have her pay tax on $75K then not have that million bucks. Calculate out the tax and I bet you'll feel differently about it.

Typical retirees are like typical students and typical military members. They don't really pay taxes in any significant way. Your mom is pretty typical as far as retirees go. She's barely into the 22% bracket. What's her effective tax rate going to be, 10-12%? Something like $8K maybe? Not sure how much effort I'd put in to try to lower it from $8K to $7K.
This. There’s no tax bomb here. They’re just finally paying the taxes they’ve deferred and it’s not even that much. Doesn’t even trigger irmaa.
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
Exchme
Posts: 1359
Joined: Sun Sep 06, 2020 3:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Exchme »

White Coat Investor wrote: Tue Mar 26, 2024 8:35 pm
trilobyte wrote: Tue Mar 26, 2024 3:17 pm This is an extension of sorts from a thread I made earlier in the month over in 'Personal Finance': viewtopic.php?t=425871&start=50 - I figured this question is specific enough to investing that it required its own thread in 'Personal Investments'; but mods please let me know otherwise.

In short, I'm looking for a sanity check to assert that I'm indeed correct that a tax-bomb is waiting for my mom now that she is a widow and, if so, did I correctly cover the options available to her to that minimize impact.

Some facts:
  • Dad died last month. He was retired and would have been 70 later this year (in September)
  • Mom, the survivor, is retired and is turning 75 later this year (in May)
  • Mom has a managed Rollover IRA @ ~$75k. She is taking RMDs.
  • Dad has a managed Rollover IRA (Mom is beneficiary) @ ~$170k. He was not taking RMDs.
  • Dad has a 401k w/ his employer @ ~$900k (Mom is beneficiary). He was not taking RMDs.
  • Mom & Dad have a Joint Taxable Brokerage Account @ ~$130k.
  • Mom has a pension structured as an annuity. She'll get ~$2.5k a year until she dies.
  • They had been filing taxes as Married/Jointly. Current tax bracket is 10%.
  • Mom and Dad were getting ~$61k in social security. That will now go down to ~$33k a year.
  • They have been living off SS since retirement and never tapped into savings. They have paid nothing in federal taxes for the last couple of years.
  • Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
  • She will likely be selling her home during this time (~$300k)
  • No life or long-term care insurance. Just Medicare w/ Medigap and prescription.
  • Mom is a veteran, but unfortunately doesn't qualify as a wartime veteran
  • Added since original post: Me and my 2 siblings are contingent beneficiaries of equal payout on all of my Dad's accounts.
Please let me know if there are some other facts I'm missing that could change the calculus.

After reading IRS articles, Boglehead posts, and watching lectures, I'm starting to realize that there may be a major tax bomb waiting for my mom. Since she's already taking RMDs, once she gets my Dad's assets she'll need to take RMDs on those. In addition, come 2026, there is a good chance the tax brackets will shift out of favor. So in the next 2-3 years she'll be going from the 10% bracket to the 25% or 28% brackets.

I was able to come up w/ the following options for her:
  • If she treats Dad's assets as inherited, she can delay RMDs on those assets until 2027 which she'll have to start taking Beneficiary RMDs (Single Lifetime Table). She'll go from 10% (2024, 2025, 2026) to 28% (2027) at that point
  • She has the option to treat Dad's assets as inherited until 2026 which she can assume ownership and start taking RMDs according to her age against the Uniform Lifetime Table. Doing so she'll go from 10% (2024, 2025) to 25% (2026, 2027). I think she has to do this in 2026 since 2027 is when the Beneficiary RMD requirement kicks in.
  • If she decides to assume ownership of Dad's assets this year, she'll go from 12% (2024) to 22% (2025) to 25% (2026). While she'll have to take RMDs on the assets in 2024, she at least gets the ability to still file as Married/Jointly in 2024.
I've informally talked with a financial advisor as well as a CPA (both are family friends). They both told me to go with the 3rd option (full ownership in 2024). The advisor's point of view was "If she's likely going to need the money anyway due to her long term care needs, it may not be worth the trouble and possible mistakes involved in trying to eek out that last bit of tax-deferring given you are only looking at a couple of years". The CPA's point of view was "Just go ahead and get what you can over the tax wall while she still in a lower tax bracket".

I'm inclined to agree. When I do the math, deferring RMDs as long a possible is still the most lucrative; but not by much - and probably a wash given a certain percentage of error. It's probably because of the short time scale involved. I'm also worried that Mom's mental health is declining rapidly now that Dad died, so she may need this money in the next few years anyway.

Do these options seem correct? Is there something I could be overlooking? I think Mom & Dad, unfortunately, have missed their optimal window to do Roth conversions (if I'm understanding right, RMDs cannot be converted); so I don't see anything more here that can be done to minimize the tax bomb.
What tax bomb are you talking about? Your mom has $35K in SS and pension income and an IRA of just over a million. The RMD on that will be something like $40K to start. So $75K in income. How much tax do you think she'll owe on <$75K and why do you call it a "tax bomb"? I'd certainly rather have her pay tax on $75K then not have that million bucks. Calculate out the tax and I bet you'll feel differently about it.

Typical retirees are like typical students and typical military members. They don't really pay taxes in any significant way. Your mom is pretty typical as far as retirees go. She's barely into the 22% bracket. What's her effective tax rate going to be, 10-12%? Something like $8K maybe? Not sure how much effort I'd put in to try to lower it from $8K to $7K.
It probably won't even be that much as OP says mom will probably need full time care about the time the husband's RMDs have to start. Firing up a tax estimator program and assuming mom gets $20k interest each year from taxable and $45K RMD, $2.5K pension and $70K assisted living costs (could be higher depending on the care she needs and where they live), the tax bill would be $4K. Strategies discussed like disclaiming part of the husband's IRA could easily backfire, nothing fancy is needed.
sc9182
Posts: 2206
Joined: Wed Aug 17, 2016 7:43 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by sc9182 »

Afraid WCI called-our the bluff on non-existent tax-bomb..

Sorry for Dad’s loss - but there is not whole lot to optimize here.

What about “step-up basis” assets and/or insurance payouts, and/or higher-of-the-two max-SS !? Tax tail aside, is having more “net monies” into pocket — is that ever a problem !? (sure, there is a single Mom in Podunk - that’s a problem - guess no one’s mom lives there !!)

Also - having large IRA may be blessing on/upon failing health with medical and/or LTC needs —
she is in best tax heaven — still searching for the non-existent bom’ around here!!
User avatar
Lee_WSP
Posts: 10476
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Lee_WSP »

trilobyte wrote: Tue Mar 26, 2024 9:37 pm I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
By my napkin math, using the current brackets, she’d only paying an extra 2% on a fraction of the RMDs. Her only real gripe is that they’re happening sooner than expected. Not that it wouldn’t happen at all.

Also, it’s probably in her best interest that this was forced on her as the longer you wait the worse the actual bomb becomes.
User avatar
White Coat Investor
Posts: 17527
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by White Coat Investor »

trilobyte wrote: Tue Mar 26, 2024 9:37 pm I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
I agree there's a penalty there, but what is it, $1-2K? Doesn't seem like all that much for a millionaire.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
HipCoyote
Posts: 253
Joined: Mon Jan 27, 2020 5:30 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by HipCoyote »

retired@50 wrote: Tue Mar 26, 2024 3:25 pm
trilobyte wrote: Tue Mar 26, 2024 3:17 pm
Mom is currently disabled and, soon, will likely require long-term / end-of-life care beyond what I can provide (assisted living / nursing home). This is likely sometime between the next 1 to 5 years. Dad was not just her husband, but also her long-term care nurse.
It's possible she'll be eligible for medical expense deductions if she needs assistance with 2 or more activities of daily living. ADLs.

My FIL had 6 figures of medical expense deductions for several years. The money to pay those huge costs was taken from an IRA (seen as ordinary income) and then those expenses were promptly deducted on his Form 1040 which reduced his income dramatically. He wound up in a low tax bracket.

More details here: https://www.irs.gov/taxtopics/tc502
and here: https://www.elderlawanswers.com/tax-ded ... costs-7184

Regards,
Totally agree. If mom is going to be that ill, get a letter from a med provider that specifically says she needs assistance with the daily living things such as bathing, clothing, toileting, etc. I think you will find that the med expenses will far offset most income. In my mother's case, we're spending
$85K a year...and it is going up again soon.

Danged sorry to read about mom and early demise of father. So sorry.
RetiredAL
Posts: 3571
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by RetiredAL »

White Coat Investor wrote: Tue Mar 26, 2024 11:58 pm
trilobyte wrote: Tue Mar 26, 2024 9:37 pm I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
I agree there's a penalty there, but what is it, $1-2K? Doesn't seem like all that much for a millionaire.
WC -- DW and I have similar income/investments, The modeling I've done says the tax bill for the survivor will more than double in $. This jump for us will be approx $5K/year. Irritating, but I agree not not poverty creating. Our survivor will go from IRMAA base to at least the top of IRMMA step-1 and might end up in step-2.
livingalmostlarge
Posts: 233
Joined: Sun Jan 14, 2018 4:03 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by livingalmostlarge »

My dad also passed this month and I'm converting up to $200k for my parents and did for the last couple of years. I'm debating this last year doing it one more time this year. My mom is assuming the IRAs as hers.

The difference is my mom is the one with the pension and then SS and then RMDs being 73 this years. My dad being a lot older meant that my mom has a lot of years left. My mom starts at irmaa after pension and SS so i've been trying to trim their rmds these past 3-4 year by converting to roth everything. They've paid a lot in taxes while still filing mfj

And no way would it make sense for any of the kids to have inherited anything. In fact I told my mom to leave everything to my kids, which is another step we have to work on. The real issue is the house and condo. Sigh. Even with the stepped up basis it's not going to help the house I think. The condo maybe since it hasn't appreciated as much.

That's a problem for another day. Too much money and paying taxes are never a bad thing.
Topic Author
trilobyte
Posts: 12
Joined: Thu Dec 14, 2023 9:00 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by trilobyte »

White Coat Investor wrote: Tue Mar 26, 2024 11:58 pm
trilobyte wrote: Tue Mar 26, 2024 9:37 pm I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
I agree there's a penalty there, but what is it, $1-2K? Doesn't seem like all that much for a millionaire.
Before my post I didn’t realize her long term care was tax deductible; so I was staring at a situation where she would need to pull out 8-10% of retirement a year from a non-Roth right when tax brackets would change, now as a single filer. That is what spooked me I think. But even crunching those numbers, it’s not super scary (she would only be in the 25% bracket).

A missing fact, her family is long lived (into the late 90s) despite history of Alzheimer’s. So it was enough to worry me that she would have to defer long term care or find a cheaper and probably worse option to live in. In this effort I am learning a lot about assisted living, its costs, etc (around here, $300 to $400k buy in with monthly costs is a thing apparently).

I am now in charge of Mom’s livelihood so I don’t want to screw this up :) I have learned through your post and from others here that my assumptions were incorrect and that I should see the forest through the trees. Thank you and to everyone else.

At this point now we are beating a dead horse ;) I am going to take the “don’t worry route” and move my worries onto other things on this ever growing list of todos for Mom. Not to mention for myself (as I write this I am rocking a sick baby back to sleep :| )
Chardo
Posts: 1394
Joined: Fri Feb 18, 2022 12:16 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by Chardo »

A somewhat related question, if one needs to move to assisted living, is the entire cost a deductible medical expense (subject to minimum) or just the care component? Some facilities have a base rent plus varying levels of care at additional cost. Other facilities include some level of care in the base. Then there's a community fee upfront, and assorted other charges. What is potentially deductible?
User avatar
RickBoglehead
Posts: 7932
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by RickBoglehead »

Chardo wrote: Wed Mar 27, 2024 6:35 am A somewhat related question, if one needs to move to assisted living, is the entire cost a deductible medical expense (subject to minimum) or just the care component? Some facilities have a base rent plus varying levels of care at additional cost. Other facilities include some level of care in the base. Then there's a community fee upfront, and assorted other charges. What is potentially deductible?
No, the entire cost is usually not deductible. You can find some guidance via Googling, a physican needs to do an assessment of need to determine what the individual cannot do themselves, etc.

Then of course the medical costs must exceed a sizeable percentage of income.
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
User avatar
White Coat Investor
Posts: 17527
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by White Coat Investor »

trilobyte wrote: Wed Mar 27, 2024 2:56 am
White Coat Investor wrote: Tue Mar 26, 2024 11:58 pm
trilobyte wrote: Tue Mar 26, 2024 9:37 pm I think I should have been more careful with my words initially - maybe I should have called it a "widows penalty" rather than "tax bomb"?

The spirit of my post was more about the realization that RMDs are going to hit mom sooner than she anticipated (due to now being a widow), that they will occur under a new filing status, and what if anything should be done about it. From my mom's perspective, this "feels" like a bomb since she wasn't expecting to be doing this at all right now.

I've learned a lot about post retirement concerns this last month and I hope this thread also helps others in similar situations down the road. I know it'll help me with planning my retirement in about 25 years. Mom and Dad didn't have a plan for these types of situations, unfortunately, but maybe I can learn from that.

I have realized just in this short thread alone that indeed, there is probably nothing to worry about and just to go ahead and move forward with ownership and not try to over optimize. And given that likely the majority of her income will go to medical expenses, taxes will likely be moot anyway.
I agree there's a penalty there, but what is it, $1-2K? Doesn't seem like all that much for a millionaire.
Before my post I didn’t realize her long term care was tax deductible; so I was staring at a situation where she would need to pull out 8-10% of retirement a year from a non-Roth right when tax brackets would change, now as a single filer. That is what spooked me I think. But even crunching those numbers, it’s not super scary (she would only be in the 25% bracket).

A missing fact, her family is long lived (into the late 90s) despite history of Alzheimer’s. So it was enough to worry me that she would have to defer long term care or find a cheaper and probably worse option to live in. In this effort I am learning a lot about assisted living, its costs, etc (around here, $300 to $400k buy in with monthly costs is a thing apparently).

I am now in charge of Mom’s livelihood so I don’t want to screw this up :) I have learned through your post and from others here that my assumptions were incorrect and that I should see the forest through the trees. Thank you and to everyone else.

At this point now we are beating a dead horse ;) I am going to take the “don’t worry route” and move my worries onto other things on this ever growing list of todos for Mom. Not to mention for myself (as I write this I am rocking a sick baby back to sleep :| )
I think that's a good idea to move to the "don't worry" route. Even if she needs LTC, she can afford to pay for at least 10 years of $100K a year LTC, and at that point would qualify for Medicaid and wouldn't be leaving an impoverished spouse behind.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
retired@50
Posts: 13094
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by retired@50 »

RickBoglehead wrote: Wed Mar 27, 2024 7:03 am
Chardo wrote: Wed Mar 27, 2024 6:35 am A somewhat related question, if one needs to move to assisted living, is the entire cost a deductible medical expense (subject to minimum) or just the care component? Some facilities have a base rent plus varying levels of care at additional cost. Other facilities include some level of care in the base. Then there's a community fee upfront, and assorted other charges. What is potentially deductible?
No, the entire cost is usually not deductible. You can find some guidance via Googling, a physican needs to do an assessment of need to determine what the individual cannot do themselves, etc.

Then of course the medical costs must exceed a sizeable percentage of income.
The percentage, at least currently, is 7.5% of AGI. It has moved around in past years.
From the IRS link above.
If you itemize your deductions for a taxable year on Schedule A (Form 1040), Itemized Deductions, you may be able to deduct the medical and dental expenses you paid for yourself, your spouse, and your dependents during the taxable year to the extent these expenses exceed 7.5% of your adjusted gross income for the year.
Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
HeelaMonster
Posts: 1065
Joined: Sat Aug 10, 2019 11:46 am

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by HeelaMonster »

RickBoglehead wrote: Wed Mar 27, 2024 7:03 am
Chardo wrote: Wed Mar 27, 2024 6:35 am A somewhat related question, if one needs to move to assisted living, is the entire cost a deductible medical expense (subject to minimum) or just the care component? Some facilities have a base rent plus varying levels of care at additional cost. Other facilities include some level of care in the base. Then there's a community fee upfront, and assorted other charges. What is potentially deductible?
No, the entire cost is usually not deductible. You can find some guidance via Googling, a physican needs to do an assessment of need to determine what the individual cannot do themselves, etc.

Then of course the medical costs must exceed a sizeable percentage of income.
Other threads on this question suggest that deductibility may not be all that limited (once medical necessity has been established)....

viewtopic.php?t=408699
viewtopic.php?t=427054
twh
Posts: 1810
Joined: Sat Feb 08, 2020 2:15 pm

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by twh »

RickBoglehead wrote: Wed Mar 27, 2024 7:03 am
Chardo wrote: Wed Mar 27, 2024 6:35 am A somewhat related question, if one needs to move to assisted living, is the entire cost a deductible medical expense (subject to minimum) or just the care component? Some facilities have a base rent plus varying levels of care at additional cost. Other facilities include some level of care in the base. Then there's a community fee upfront, and assorted other charges. What is potentially deductible?
No, the entire cost is usually not deductible. You can find some guidance via Googling, a physican needs to do an assessment of need to determine what the individual cannot do themselves, etc.

Then of course the medical costs must exceed a sizeable percentage of income.
Once you are in an assisted living for medical reasons, these costs will dwarf any RMD's and the 7.5% Schedule A threshold will be minor. Just about everything in an assisted living center is deductible. The things that are not include things like an in-room telephone.
yysh
Posts: 7
Joined: Mon Mar 25, 2024 12:00 am

Re: I think my Mom, recently widowed, is looking at a tax bomb

Post by yysh »

Did you check if your mom qualify for Veterans Healthcare? I am working in VA hospital and am very impressive to the care VA provides.
Post Reply