Captures some of my analysis of the effect of Thrump's "Tax Cut and Job Act" on my strategy for managing my pre-tax IRA funds. Specially written for couples over 65 on Medicare due to the effect of Gross Taxable Income on both federal income tax and Medicare Premiums. Identifies general tax planning strategies and also identifies a largely unaddressed risk, which is effect of change in income tax filing status when a spouse dies (from "Married Filing Jointly" to filing as "Single").
1. Call Your Financial Planner
Effects Of
Tax Cuts and Jobs Act
For Couples Over 65
James K. Orr
December 26, 2017
2. Retirement Planning Is Complex
• This presentation is targeted for married
couples over 65 on Medicare
• Tax strategies for this group is more difficult
because you have to consider more factors
including:
– Increasing Medicare Premiums as Gross Taxable
Income goes up
– What happens to taxes on pre-tax IRA or 401K
funds if one spouse dies
3. What This Presentation Does
• Compares Federal Income Tax for:
– Married under Tax Cuts and Job Act
– Married under prior rates that return after 2025
– Single under Tax Cuts and Job Act
– Single under prior rates that return after 2025
• Then compares Federal Income Tax plus
Medicare premiums (target audience over 65)
for the above four categories
4. Conclusions
• Tax Cut and Job Acts provides superb savings
for those in their late 60s to early 70s to save
total (Federal Income tax plus Medicare
premiums) during the period the lower rates
are in place
• Unique “gift” to move pre-tax IRA and 401K
savings into post tax status (ideally, to Roth
IRAs).
5. Special Risk Not Often Considered
• A friend whose wife passed away a couple of
years ago alerted me to a financial risk that is
probably largely unrecognized.
– For relatively stable income including pre-tax IRA
Required Minimum Distributions (RMD), there can be
sharp increases in Federal Tax Rate as income is taxed
as “single” rather than “married filing jointly”
– Two years later, there can be sharp increases in
Medicare Premiums if Gross Taxable Income exceeds
the level to trigger higher Medicare Premiums
($85,000)
6. How To Address Taxes and Premiums
• Federal Income tax gradually increases with net taxable
income
• Medicare premiums abruptly jump with increases in
Gross Taxable Income
• Combining the two requires some simplifying
assumptions:
– Assume delta between Gross Taxable Income and Net
Taxable Income is only the Standard Deduction under the
Tax Cut and Jobs Bill
• $ 24,000 for couples filing as “Married Joint Return”
• $ 12,000 for singles filling as “Single”
• Medicare uses the filing category from the prior year’s tax return
to determine increases in Medicare Premiums with income
7. Relationship Between Taxable Income
Gross Taxable
Income
Married Net
Taxable Income
Single Net
Taxable Income
$21,525 $0 $9,525
$43,050 $19,050 $31,050
$50,700 $26,700 $38,700
$84,999 $60,999 $72,999
$85,001 $61,001 $73,001
$90,100 $66,100 $78,100
$94,500 $70,500 $82,500
$101,400 $77,400 $89,400
$106,999 $82,999 $94,999
$107,001 $83,001 $95,001
$131,000 $107,000 $119,000
$133,499 $109,499 $121,499
$133,501 $109,501 $121,501
$159,999 $135,999 $147,999
$160,001 $136,001 $148,001
$169,500 $145,500 $157,500
$169,999 $145,999 $157,999
$170,001 $146,001 $158,001
$180,200 $156,200 $168,200
$189,000 $165,000 $177,000
$212,000 $188,000 $200,000
$213,999 $189,999 $201,999
$214,001 $190,001 $202,001
$224,500 $200,500 $212,500
$262,000 $238,000 $250,000
$266,999 $242,999 $254,999
$267,001 $243,001 $255,001
$319,999 $295,999 $307,999
$320,001 $296,001 $308,001
$339,000 $315,000 $327,000
This table includes key net income tax levels for
changes in tax brackets (old rates and new
rates).
This table also includes key Gross Taxable
Income levels for abrupt jumps in Medicare
Premiums. At these “jumps”, values are shown
for $ 1 below and $ 1 above the “jump”
amount.
This table includes the above for both filing as
“Single” and “Married Joint Return”.
10. Move to a Normalize Approach
• It is difficult to extract usable information in
total dollar format.
• Convert to a percentage using Gross Taxable
Income
– Reminder of assumptions to convert Gross Taxable
Rate (used to determine Medicare Premiums) to
Net Taxable Income (used to determine Federal
Income Tax)
12. Generalizing Conclusions
• Every couple’s situation is different based on
– Amount of money needed to live on each year
– Social Security income (amount and decision
when to start drawing Social Security)
– Other steady income such as pensions or
annuities
– Total pre-tax funds in IRA, 401K, etc.
– Total post tax funds
13. Idealized Situation To Optimize Taxes
• Few of us are in the ideal situation that I
describe below
– Social Security, pensions, and annuities generally
cover out annual money needed for living
expenses
– Moderately large pre-tax IRA, 401K funds, etc.
– Significant post tax funds to pay taxes for
converting pre-tax funds to Roth IRAs
• This only looks at Federal Income Tax and
Medicare Premiums. If you have state income
tax, then the situation is different.
14. Savings Strategy # 1
• If previously planning to convert all pre-tax
IRA, etc. funds to Roth IRA or withdraw for
post tax use in 2018 to 2025
– Maintain current plan for converting pre-tax IRA,
etc. funds
– Maintain “Married Filing Jointly” over the 2018 to
2025 period (see risk mitigation strategy later)
– Saving due to lower rate of Federal Income Tax
plus Medicare Premiums as shown in next two
charts
17. Savings Strategy # 2
• If previously planning not to convert all pre-
tax IRA, etc. funds to Roth IRA or withdraw for
post tax use in 2018 to 2025
– Consider accelerating conversion to increase
savings due to moving more money to post tax,
ideally Roth IRA in 2018 to 2025
– Saving due to:
• Lower rate of Federal Income Tax plus Medicare
Premiums as shown in next two charts
And/Or
• Lower future taxes if pre-tax funds are converted to
Roth IRA (no future federal tax income)
19. Risk Mitigation Strategy
• Percent of Gross Income paid to Federal Income
Tax and/or Medicare Premiums will increase
greatly if a spouse dies unexpectedly.
• If most of pre-tax IRA, etc. funds have been
converted to Roth IRA before death, then there is
no effect since no taxes are due.
• Most sever penalty will be for funds that could
have been converted in 2018 to 2025 as “Married
Filing Jointly” that are later converted after 2026
as “Single”
• There is a penalty even in the 2018 to 2025
period
22. Final Thoughts
• This is complex stuff with variable (like a death
of a spouse) which are not under out control.
• Lower tax rates from 2018 to 2025 provide an
opportunity for those with large pre-tax IRA,
401K, etc. funds.
• Best strategy is dependent on a couple’s
unique situation.
• Explore alternatives to see what is best for
you.
• Good luck and a long, healthy life!
