Help me with my 86-year old MIL taxes

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Topic Author
privateID
Posts: 318
Joined: Sat Oct 18, 2014 4:59 pm

Help me with my 86-year old MIL taxes

Post by privateID »

I've been managing my mother-in-law's money since her husband passed away a few years ago at the request of her kids. I have done alot of simplification and have tried to be tax-efficient wherever possible. I am currently looking to see if there are any ways to help her save on taxes. Here's some info:

1) Approx $229K yearly income:
a) SS - $24K
b) Annuities and pension: $115K
c) IRA RMD: $26K
d) EE bonds (maturing for next 5 years): $26K
e) Investment (mostly dividends): $38K

2)Investments:
a) Stocks (all taxable): $1.35 mil (all have high cap-gains):
- individual
- index funds (TSM, ITSM, Mid-cap index, small-cap Growth, small-cap value, large-cap value)
b) Fixed Income: $2 mil:
- Vanguard Limited-Term Tax-Exempt (taxable)
- Vanguard Inflation-Protected Securities (taxable)
- Vanguard Intermediate-Term Bond Index (IRA)
- Bank accounts (taxable)

3) Pertinent tax levels:
a) IRMAA level is MAGI between $165K and $500K. Don't believe she can get below $165. Nothing to do here.
b) Net Investment income tax threshold AGI > $200K. Every dollar over that is extra taxed (3.8%) depending on total investment income and MAGI over $200K. So a little over $1K extra in taxes.
c) Tax brackets:
- Fed 32%($164,926 to $209,425)
- Fed 35% ($209,426 to $523,600)
- State: around 5%

4) Other info:
a) 3 children and 4 grandchildren.
b) She has been gifting to the children every year and even helping the grand children fund their Roth IRAs.
c) She is still very active and travels alot. I have encouraged her to vacation with family which she loves to do.
d) She has been donating some of her RMDs to charity.
e) Generally pretty healthy. Has fully paid off LTC insurance when spouse passed away (I don't think they even sell such policies anymore).

Looking for advice on how to save her money on taxes. So far, have considered the following:
- Encouraging her to do more Qualified Charitable Distributions from her RMD.
- Interested on what investment to sell if need extra money to pay for something. Was thinking her Vanguard Inflation-Protected Securities is the best bet given lower cap-gains and inefficient on Fed taxes. Thoughts?
- Anything else? Ideas?

Appreciate any input. What is amazing to me is that she is so well off having lived a pretty modest life. I wish she had spent more when she was younger.
billfromct
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Re: Help me with my 86-year old MIL taxes

Post by billfromct »

What state is she living in?

If it’s Massachusetts, their estate tax kicks in at $1M & if the estate is $1,000,001, the estate tax “claws back” to the first dollar.

I believe the Massachusetts estate tax rate starts at .8% & the top rate is 16%.

The reason I mention this is because the Massachusetts state income tax rate is 5% & you mention that her state income tax rate “is around 5%”.

bill
Topic Author
privateID
Posts: 318
Joined: Sat Oct 18, 2014 4:59 pm

Re: Help me with my 86-year old MIL taxes

Post by privateID »

Thanks. No estate taxes.
delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Help me with my 86-year old MIL taxes

Post by delamer »

You didn’t say what form the gifts are taking, but one option is to gift shares of stock from the taxable account rather than gifting cash.

If she’s currently selling stocks to make the gifts, gifting shares will reduce any capital gains taxes she pays. Yes, this does transfer any taxes due to the recipients. But maybe they will have a lower tax rate or will hold onto the shares. In any case, if someone’s giving you a gift, you shouldn’t complain about having to pay taxes on it. :wink:

If she isn’t currently selling stocks to make the gifts, then gifting shares will reduce the dividends your MIL receives and pays taxes on. Same situation on the recipients’ taxes as above.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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Stinky
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Re: Help me with my 86-year old MIL taxes

Post by Stinky »

Your MIL is paying what may seem to be a lot of taxes because she has an excellent income. An 86 year old with a $229k annual income and over $3 million in liquid assets is in great financial shape.

You say that you want her to do more QCDs. Is she currently using QCDs for all of her charitable donations? If not, she should be. And, if she is more charitable than the QCD limit, then donate appreciated shares from the taxable account to charity.
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Topic Author
privateID
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Joined: Sat Oct 18, 2014 4:59 pm

Re: Help me with my 86-year old MIL taxes

Post by privateID »

Interesting idea to gift stock to family. She has usually gifted with cash. I was generally not concerned about the capital gains in the stock. I imagined she will never have a need to sell the stock and eventually there would be a step-up basis. But I guess it would lower yearly capital gains/dividends from the funds, so I guess there would be some savings there. The gifts have been primarily coming from cash flow and not reinvesting dividends. So then the question would be, if gifting with stock, where to invest the extra cash that she is not gifting from her cash. If I put right back into stocks, it doesn't help any yearly cap gains/dividends. If I put it into bonds, then they are tax inefficient there. Not sure I see the big gain in gifting stock to family unless there are indeed in a much lower tax bracket, and even then it would need to 0% to make sense to me.

Generally, all her donations are from QCDs. There are a few small stray donations she makes here and there. She does not donate to her QCD limit. I assume QCDs make more sense than donating appreciated stock since she does not itemize.
chemocean
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Re: Help me with my 86-year old MIL taxes

Post by chemocean »

privateID wrote: Wed Oct 13, 2021 7:26 am The gifts have been primarily coming from cash flow and not reinvesting dividends. So then the question would be, if gifting with stock, where to invest the extra cash that she is not gifting from her cash. If I put right back into stocks, it doesn't help any yearly cap gains/dividends.
If you put the extra cash into an ETF index fund, your overall capital gains distributions will be less. One advantage of ETFs is that they do not generate capital gains distribution. Although capital gains distributions on index funds are usually small or zero. You could choice to sell the taxable index funds with highest dividend return. Going into ETFs might just complicate the estate and skew the asset allocation .
Topic Author
privateID
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Re: Help me with my 86-year old MIL taxes

Post by privateID »

chemocean wrote: Wed Oct 13, 2021 7:47 am You could choice to sell the taxable index funds with highest dividend return.
If I was going to sell anything, I was thinking TIPs is the way to go. It's the most tax-inefficient and has less capital gains.

I am trying to keep things simple, but I am getting the point that gifting inefficient stock funds, like value funds, would help at the expense of transferring a capital gain to the receiver.
exoilman
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Re: Help me with my 86-year old MIL taxes

Post by exoilman »

Reference
delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Help me with my 86-year old MIL taxes

Post by delamer »

privateID wrote: Wed Oct 13, 2021 7:26 am Interesting idea to gift stock to family. She has usually gifted with cash. I was generally not concerned about the capital gains in the stock. I imagined she will never have a need to sell the stock and eventually there would be a step-up basis. But I guess it would lower yearly capital gains/dividends from the funds, so I guess there would be some savings there. The gifts have been primarily coming from cash flow and not reinvesting dividends. So then the question would be, if gifting with stock, where to invest the extra cash that she is not gifting from her cash. If I put right back into stocks, it doesn't help any yearly cap gains/dividends. If I put it into bonds, then they are tax inefficient there. Not sure I see the big gain in gifting stock to family unless there are indeed in a much lower tax bracket, and even then it would need to 0% to make sense to me.

Generally, all her donations are from QCDs. There are a few small stray donations she makes here and there. She does not donate to her QCD limit. I assume QCDs make more sense than donating appreciated stock since she does not itemize.
The more she gifts, whether to family or charity, the lower her income will be and the more she’ll save in taxes. But I certainly wouldn’t push someone to give away money just to lower their taxes.

I’m no tax expert, but I don’t think there aren’t too many other tax-reducing options for her.

We gifted stock shares to our adult children when they were in the 0% bracket for long-term gains. A win-win, given that we planned to do the gifting anyway.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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