CSS Tax Planning for Retirees 2 — Questions and Answers
Question 1: What is the net investment income tax (NIIT) rate and when does it apply to retirees?
- 2.5% on all investment income for retirees over 65
- 3.8% on net investment income for those with modified AGI exceeding $200,000 (single) or $250,000 (MFJ) (Correct answer)
- 5% on capital gains for high-income retirees
- A flat 10% on all passive income
Correct 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).
Question 2: Which tax-efficient retirement income source is NOT included in Medicare IRMAA income calculations?
- Traditional IRA withdrawals
- Roth IRA qualified distributions (Correct answer)
- Capital gains from stock sales
- Pension income
Correct 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.
Question 3: What is tax-loss harvesting, and how can it benefit a retiree's taxable portfolio?
- Selling winning positions to realize gains before year-end
- Selling positions at a loss to offset capital gains and potentially reduce ordinary income by up to $3,000 per year (Correct answer)
- Harvesting dividend income only in low-tax years
- Switching from taxable to tax-deferred accounts
Correct 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.
Question 4: How is the long-term capital gains tax rate for a married couple filing jointly with taxable income of $90,000 in 2024?
- 0% (Correct answer)
- 15%
- 20%
- 23.8%
Correct 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.
Question 5: What is the 'widow's penalty' (or widow's tax trap) in retirement tax planning?
- The additional estate tax paid by surviving spouses
- The jump to a higher tax bracket when a spouse dies and the survivor files as 'single' instead of 'married filing jointly' (Correct answer)
- The penalty for failing to take an RMD after a spouse's death
- Higher Social Security taxes owed by surviving spouses
Correct 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.
Question 6: A retiree wants to reduce future RMDs. Which strategy directly reduces the balance in a traditional IRA subject to RMDs?
- Purchasing an annuity inside the IRA
- Performing Roth conversions to move assets to a Roth IRA (which has no RMDs during the owner's lifetime) (Correct answer)
- Rolling over the IRA to a 401(k)
- Investing IRA funds in municipal bonds
Correct 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.
CSS Tax Planning for Retirees 2
What is the net investment income tax (NIIT) rate and when does it apply to retirees?