Tax Planning for Retirees Flashcards
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Read the first 6 Tax Planning for Retirees flashcards as text
What is the net investment income tax (NIIT) rate and when does it apply to retirees?
Answer: 3.8% on net investment income for those with modified AGI exceeding $200,000 (single) or $250,000 (MFJ)
The NIIT applies a 3.8% surtax on net investment income (interest, dividends, capital gains, rental income) for taxpayers with MAGI above $200,000 (single) or $250,000 (married filing jointly).
Which tax-efficient retirement income source is NOT included in Medicare IRMAA income calculations?
Answer: Roth IRA qualified distributions
Qualified Roth IRA distributions are not included in modified adjusted gross income (MAGI) and therefore do not affect IRMAA surcharge calculations for Medicare premiums.
What is tax-loss harvesting, and how can it benefit a retiree's taxable portfolio?
Answer: Selling positions at a loss to offset capital gains and potentially reduce ordinary income by up to $3,000 per year
Tax-loss harvesting sells securities at a loss to offset realized capital gains, and any excess losses can offset up to $3,000 of ordinary income per year, with remaining losses carried forward.
How is the long-term capital gains tax rate for a married couple filing jointly with taxable income of $90,000 in 2024?
Answer: 0%
In 2024, the 0% long-term capital gains rate applies to married couples filing jointly with taxable income up to $94,050, meaning many retirees pay no tax on long-term capital gains.
What is the 'widow's penalty' (or widow's tax trap) in retirement tax planning?
Answer: The jump to a higher tax bracket when a spouse dies and the survivor files as 'single' instead of 'married filing jointly'
The widow's penalty occurs when a surviving spouse loses the wider married filing jointly brackets and pays higher taxes on the same income under the narrower single filing brackets.
A retiree wants to reduce future RMDs. Which strategy directly reduces the balance in a traditional IRA subject to RMDs?
Answer: Performing Roth conversions to move assets to a Roth IRA (which has no RMDs during the owner's lifetime)
Roth conversions move pre-tax dollars from a traditional IRA (subject to RMDs) to a Roth IRA (not subject to RMDs during the owner's lifetime), reducing future mandatory distributions.