Ask Liz Weston

Get smart with your money

Taxes

Q&A: A retirement catch-22 and health savings accounts

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Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

Q&A: Beware the insurance salesperson in financial planner’s clothing

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Dear Liz: Do you have any general advice for choosing a tax preparer? My financial advisor has recommended switching my 403(b) contributions over to Roth 403(b) with the same investment plan. I am worried that this could put us at risk for a higher tax bracket currently.

Answer: Ideally, a financial advisor wouldn’t recommend switching to a Roth option without knowing a fair amount about your current and future tax situations. Otherwise, the advisor wouldn’t be qualified to determine whether giving up the current tax break is likely to pay off later.

Unfortunately, not all financial advisors are truly qualified to give the advice they do. Some, particularly those advising people about 403(b) investments, are insurance salespeople rather than fiduciary financial planners.

You can get referrals to tax pros from the National Assn. of Enrolled Agents and your state’s chapter of certified public accountants. (The American Institute of CPAs has compiled a list of those at its website.) Both enrolled agents and CPAs are fiduciaries who promise to put your best interests first.

For broader financial advice, consider getting referrals from one of the organizations representing fee-only fiduciary planners such as the Garrett Planning Network, the XY Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners.

Also, teachers should consider spending some time on the nonprofit 403bwise website, which grades school districts’ retirement plans and seeks to educate teachers about the costs of trusting the wrong people.

Q&A: He’s held stocks for decades. Should he sell before he dies?

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Dear Liz: My father-in-law, age 100, has more than $1 million in stocks and bonds purchased in the 1980s and 1990s. With the stock market so high, I have suggested that he might want to sell the investments, take the tax hit and consolidate into short-term certificates of deposit or similar. This would make it easier for his family to manage (in trust) upon his death. Does this make sense or do we leave it alone?

Answer: Selling now means your father-in-law would have to pay a substantial and perhaps unnecessary tax bill on the gains he’s incurred over the years. If he instead leaves those assets to his heirs at his death, most likely no tax would be owed on the gains.

There are some exceptions, such as if the investments are held in retirement accounts or an irrevocable trust. But investments held in revocable trusts, such as living trusts, should qualify for the favorable step-up in basis that would eliminate the taxable capital gain at his death.

Yes, there’s always a risk that the markets could drop — but they would have to drop pretty far to wipe out all his gains, assuming he’s got a reasonably diversified portfolio. A fee-only, fiduciary financial planner could review the portfolio and offer recommendations about any changes that might be needed, while a tax pro could discuss potential strategies for minimizing the tax bill.

Q&A: When landlords move in to an old rental, are tax breaks part of the deal?

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Dear Liz: My husband and I bought a single-family home as a rental property in 1988. We paid $135,000. The tenants moved out in February and we are doing major upgrades now. If we moved into the property and sold it after two years, would the first $500,000 of gain be excluded from income tax? The property is under our family trust and our two daughters are successor co-trustees.

Answer: Generally speaking, a former rental property can qualify for the home sale exclusion as long as the owners claim it as their primary residence for at least two of the five years before the sale.

The home could still be subject to depreciation recapture, however, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. You probably deducted depreciation on the rental over the years — basically reflecting the wear and tear on the property. The IRS typically requires that tax break to be paid back when the property is sold. You won’t be able to exclude the part of the gain that’s equal to any depreciation deduction allowed or taken after May 6, 1997, Luscombe says.

If your trust is a revocable living trust, which is designed to avoid probate, your ability to take the home sale exclusion won’t be affected. Other types of revocable trusts may require the home to be taken out of the trust before it’s sold, Luscombe says. If it’s an irrevocable trust, the sale of the home generally would not qualify for the home sale exclusion, he says.

You should discuss this with a tax expert before proceeding, and consider reviewing other options for reducing taxes. For example, if you kept this home until death and bequeathed it to your heirs, there probably wouldn’t be any tax on the appreciation that occurred during your lifetimes.

Q&A: Minimizing your taxes is fine — to a point

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Dear Liz: In reading your columns, one can get the impression that reducing tax liability is the primary objective for many financial advisors. I disagree with this. Paying a fair share of taxes is a responsibility to society and the less fortunate, especially for wealthy people. Why are so many financial “professionals” so obsessed with paying less in taxes?

Answer: Tax planning is an essential part of comprehensive financial planning. No one is under an obligation to pay the maximum tax possible. Those who specialize in tax avoidance love to quote a judge named Learned Hand, who wrote in 1934: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Where advisors — and taxpayers — get into trouble is when they prioritize tax avoidance over all other concerns. That’s how you get advisors doing tax loss harvesting on a financial account to reduce capital gains for an older couple in the 0% capital gains bracket (an example of this behavior from a recent column).