Ask Liz Weston

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Taxes

Q&A: Inherited IRA could increase tax bill and Medicare premiums

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Dear Liz: If someone inherits my retirement account, is there any way they can avoid having their Medicare premiums increased for one year?

Answer: A large-enough retirement account could affect their Medicare premiums for up to 10 years, not just one.

Normally inheritances aren’t taxable, but retirement accounts are the exception. Withdrawals from inherited retirement accounts are usually taxable as income, and most non-spouse inheritors must drain a retirement account within 10 years. Withdrawals from inherited Roth accounts aren’t taxable, but the accounts still must be drained by the inheritor within a decade.

If the inheritor is on Medicare, taxable withdrawals could boost income enough to increase their Medicare premiums, thanks to the income-related monthly adjustment amounts (IRMAA). This surcharge starts once modified adjusted gross income exceeds certain amounts, which in 2025 is $106,000 for single filers and $212,000 for married couples filing jointly.

Anyone who inherits a retirement plan should get advice from a tax pro, but that’s particularly important when withdrawals might affect tax brackets and Medicare premiums. The pro can help determine how quickly or slowly the money should be withdrawn to maximize how much the inheritor gets to keep.

Q&A: Maxing out retirement contributions? Beware of future tax issues

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Dear Liz: I work for a local government and am trying to decide when to retire. I will receive a pension and have put away as much money as I could afford in my 457 deferred compensation plan. I invested it in a Standard & Poor’s 500 index fund that has performed well and is now worth $1.3 million. I also have a non-sheltered brokerage account of seven figures and no debt. Last year, I contributed vacation time and money to maximize my 457 contribution of $46,000. This year (and next unless I retire), I am likewise maximizing my contribution and contributing $46,000 each year. But periodically our monthly expenditures have exceeded my monthly income after the contribution and I have had to dip into the brokerage account to make up the difference. Does that make financial sense to do if needed or should I consider scaling back my contribution?

Answer: When you’re behind on saving for retirement, maximizing your contributions to tax-deferred plans in your final working years can be a smart move.

You, however, have a large amount of savings as well as a pension, so you may face a different problem: higher future taxes. Diligent savers can find themselves pushed into a higher tax bracket when required minimum distributions (RMDs) kick in. RMDs used to begin at age 70-½, but now start at age 73 for those born between 1951 through 1959 and will rise to 75 for those born in 1960 and later.

Many people with large tax-deferred retirement accounts can reduce their lifetime tax bills by converting at least some of the funds to a Roth IRA. Conversions are taxable, but Roths don’t have required minimum distributions and future withdrawals from Roths can be tax free. Conversions can affect other aspects of your retirement, such as Medicare premiums, so you’ll want sound tax advice before moving forward. You also may want to consult a fee-only financial planner who can review your overall financial situation and help you shape your retirement income plan.

Q&A: Future mate hasn’t filed tax returns. Am I liable?

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Dear Liz: I’m engaged to someone who just confessed that they have not filed tax returns for the last several years. How do we fix this? If they owe a lot of money, could the IRS come after me if we’re married?

Answer: Technically, debts incurred before marriage are considered separate. But there are many ways premarital debt can affect postmarital life.

If you live in a community property state, for example, creditors could come after jointly owned assets if your spouse fails to pay what they owe. Your spouse’s debt could affect how much you two can borrow if you want to apply for a mortgage or other joint obligation. And the money your spouse uses to pay off the debt isn’t available for other uses that could benefit both of you. That could include everything from paying bills to going on vacation to saving for retirement.

The IRS is not a good creditor to have, in case you had any doubts. The agency has many enforcement powers, such as withholding refunds, taking part of someone’s paycheck and seizing property to pay debts. Consider working with a tax pro to get the missing returns filed as quickly as possible. The IRS also offers payment plans for those who can’t pay in full.

Inheriting stocks after a parent’s death resets the cost basis

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Dear Liz: I am a beneficiary of my father’s brokerage account. Upon his death, the brokerage company closed his account and transferred all of the equities to me in a new account. How will I know the cost basis for capital gains purposes when I sell the stocks?

Answer: You will use the value of the stocks on the day of your father’s death as the new tax basis. This is known as a “step up” in basis, since typically the fair market value at death is higher than the original basis, or what your dad paid for the stocks. Any appreciation that occurred during his lifetime won’t be taxed, but you would be subject to capital gains tax on any appreciation that occurs after that date.

Q&A: The fine print on deducting medical expenses

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Dear Liz: I take $5,000 per month out of my brokerage account (and the $1,400 in taxes when I withdraw the money) for my husband’s Alzheimer care facility where he now lives 24/7. Can I only claim that on my taxes under medical expenses if I itemize my deductions on my taxes? I don’t have any other deductions.

Answer: Your husband’s expenses may be enough to justify itemizing even if you don’t have other deductions.

The standard deduction for married couples in 2024 is $29,200. To itemize, your deductions would need to be higher than that amount. Furthermore, medical expenses must exceed 7.5% of your adjusted gross income to be deductible, notes Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If your husband meets certain criteria, however, the deduction can include the expenses related to meals and lodging at the facility as well as the medical care portion, Luscombe says.

A licensed healthcare professional must certify annually that your husband is chronically ill and living in the care facility due to medical necessity, he says. A tax pro or the facility itself can provide further details.

This week’s money news

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This week’s top story: What Trump and Harris have in store for your taxes. In other news: Credit card-bonus-friendly season is here, October mortgage outlook, and drawbacks to consider before getting metal credit card.

What Trump and Harris Have in Store for Your Taxes
Most, if not all, of the candidates’ tax proposals would need approval by Congress.

If You’re Considering a Credit Card, Bonus-Friendly Season Is Here
The October-through-December holiday window is an especially ideal time for snagging a rich welcome offer.

October Mortgage Outlook: No Rate Jumps or Scares
Mortgage rates may idle above 6% until markets and the Fed catch up.

Is Your Metal Credit Card Losing Its Edge?
Once a rare luxury enhancement, metal credit cards are more attainable for the average consumer today. And there are drawbacks to consider before getting one.