Q&A: Figuring taxes on Social Security

Dear Liz: How will our Social Security payments be affected by any passive income such as from rental properties? We have two properties, which add $3,000 monthly to our current income. I plan on retiring at 72, which is six years away. My husband may retire earlier due to health problems. We will have savings as well as my 401(k) when I retire. Although my retirement income “pencils out,” I don’t know exactly what to expect from Social Security. How should I calculate my net income in retirement?

Answer: You could pay income taxes on up to 85% of your Social Security benefits if you have other taxable income. Examples of taxable income include wages, interest, dividends, capital gains, rent, royalties, annuities, pension payments and distributions from retirement accounts other than Roths.

To determine how much of your benefit is taxable, you would first calculate your “combined income,” which consists of your adjusted gross income plus any nontaxable interest you receive plus half of your Social Security benefits. If you file a joint return, you typically would have to pay income tax on up to half of your benefits if your combined income fell between $32,000 and $44,000. If your combined income was more than $44,000, up to 85% of your benefits would be taxable.

Q&A: When institutions won’t go paperless

Dear Liz: I have for years insisted on being paperless, not only for credit card statements and utility bills but also for tax documents such as the 1099-INT and 1099-DIV. My problem is that I receive income from two lifetime annuities and those of course generate 1099-R forms each year, which are mailed to me. I have requested to receive those as PDFs from the companies that execute those annuities, and they claim they cannot do so and are not required to. Are they right, or is there some federal regulation I can quote to force the issue?

Answer: The idea that a business can’t generate an electronic form for a customer is a little ridiculous, but there’s not much you can do to force these companies to get with the times.

The IRS requires that any person or entity that files more than 250 information returns — 1099s, W-2s and other forms that report potentially taxable income — do so electronically. But that requirement applies only to forms being sent to the IRS, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. There’s no requirement that such forms be issued electronically to individuals.

Which is unfortunate, since as you know getting forms electronically is much safer than having your private financial information sent through the mail. Since these companies are so insistent on clinging to paper, consider sending a letter — certified mail, return receipt requested — to the companies’ chief executives requesting that they join the 21st century.

Friday’s need-to-know money news

Today’s top story: 7 ways small-business owners can save on taxes in 2022. Also in the news: Check your DMs for debt collectors and scams, coupling your finances for Valentine’s Day, and how one couple reconciled their relationship with money.

7 Ways Small-Business Owners Can Save on Taxes in 2022
Seven things entrepreneurs and independent workers can do to lower their tax bills and their anxiety this filing season and in the year ahead.

Check Your DMs for Debt Collectors and Scams
Sites like Instagram, Facebook and Twitter could be where debt collectors slide into your DMs.

For Valentine’s Day, Couple Your Finances
Money coaches discuss how couples can combine finances and bank accounts while balancing autonomy and partnership.

How My Fiance and I Reconciled Our Relationships With Money
When differing financial attitudes collide, communicating openly is the best way to bridge the divide.

Tuesday’s need-to-know money news

Today’s top story: IRS scraps plan to use ID.me selfies for account verification. Also in the news: How to approach taxes if you traded cryptocurrency in 2021, only 23% of investors align their investments to their values, and how to choose the right cryptocurrency wallet.

IRS Scraps Plan to Use ID.me Selfies for Account Verification
The IRS walks back a directive that would have required taxpayers to submit a video selfie to access their online accounts.

Traded Cryptocurrency in 2021? Here’s How to Approach Taxes
With the tax-filing deadline just a few months away, those who traded cryptocurrency last year should understand their tax liability.

Survey: Just 23% of Investors Align Most Investments to Their Values
Socially responsible investing is gaining in popularity, but there’s a pronounced gap between those who value it and those who actually invest this way.

How to Choose the Right Cryptocurrency Wallet
All your cryptocurrency has to be stored somewhere—here’s how to choose the right crypto wallet for your needs.

Q&A: Plan for taxes after mortgage payoff

Dear Liz: In a recent column, you answered a question from a couple who just paid off their mortgage. You suggested increasing retirement or emergency savings or possibly charitable contributions. All good, but you should have pointed out that the mortgage lender will not be responsible for paying the property tax and fire insurance going forward. I would suggest the couple open a separate account and build up a fund to pay those expenses or they could be facing financial hardship when the tax and insurance bills come.

Answer: Good point. Many homeowners are accustomed to paying their homeowners insurance and property taxes through escrow accounts set up by their mortgage lenders. Once the loan is paid off, these bills become the homeowners’ responsibility to pay.

Q&A: Taxes on retirement account withdrawals

Dear Liz: I would love to give my grandchildren money, but I don’t want to pay the income tax on withdrawals from my IRA or 401(k). Will they get it tax-free when I die?

Answer: Unfortunately, no.

Withdrawals from retirement accounts are generally taxable, whether the person making the withdrawals is the original contributor or an heir. Furthermore, non-spouse beneficiaries of retirement accounts generally must withdraw the money within 10 years.

Thursday’s need-to-know money news

Today’s top story: How to maximize your health span. Also in the news: Home affordability for first-time buyers, 6 steps to higher net worth, and how to avoid a tax bomb when selling your home.

How to Maximize Your ‘Health Span’
We’re living longer on average, but the number of years we’re healthy hasn’t kept up.

First-Time Home Buyer Metro Affordability Report — Q3 2021
Home affordability for first-time buyers was stable in the third quarter of 2021.

6 Steps to Higher Net Worth: A Year-End Financial Checklist
Review your health insurance and retirement contributions, prepare for tax time and monitor your credit.

How to avoid a tax bomb when selling your home
Write-off thresholds have stayed the same for decades.

Q&A: How to pass on inheritance to your children

Dear Liz: I may inherit $500,000 but do not necessarily need the money for my retirement. Is there a way to pass that inheritance, or a part of it, to my two children without incurring a taxable event for myself or for them? I may want to ask my parents to add that to their trust or will.

Answer:
You can “disclaim” or refuse to accept all or part an inheritance. If you do so correctly, the assets will pass to the next beneficiary as dictated by the estate documents (or by state law, in the absence of a will or living trust). If you think you’ll want this option, definitely discuss this with your parents and their estate planning attorney so the documents can be set up properly.

Keep in mind that few families have enough wealth to be affected by gift or estate taxes. Only people who give away millions of dollars in their lifetime have to pay gift taxes, for example. If you decide not to disclaim and later give the entire $500,000 to your kids, you wouldn’t have to pay gift taxes until you gave away considerably more. Plus, gifts are tax free to the recipients.

Gift and estate laws are always subject to change, so definitely consult a tax pro before making any decision regarding either.

Q&A: Ask a tax pro before Roth conversion

Dear Liz: I’m almost 70, still working, and I’ve got a decent-size IRA as well as a 403(b) that I plan to move to an IRA when I retire. Because I have a pension and other investments, I don’t think I’ll ever need the money in the IRA and 403(b). Should I convert to a Roth now so my kids (31 and 28) won’t have to pay taxes when they inherit it? I’ve got the cash to cover the taxes for the Roth conversion.

Answer: That would be a generous move, but you should consult a tax pro to make sure you understand the implications.

As you know, converting a pre-tax retirement account such as an IRA, 401(k) or a 403(b) to a Roth IRA can generate a sizable income tax bill. Such conversions can push you into a higher tax bracket and, if you’re on Medicare, also may increase your premiums.

You may want to spread the conversion over several years, converting just enough each year to “fill out” your tax bracket and avoid Medicare surcharges. A tax pro can help with those calculations.

Q&A: Should you sell a house or let heirs deal with it? The taxes shake out differently

Dear Liz: My mother, who will be 101 later this year, is leaving me real estate in her trust. The value of it is $4.5 million. She has other assets that will put her estate over $5 million when she passes. I currently have an offer from someone who wants to buy the real estate. Is it better for her to sell it now and reduce the value of her estate? She has never exercised the option for the one-time sale of her primary residence tax free. What are the tax implications if it remains in her estate until she passes?

Answer: There’s no such thing as a one-time option to sell a home tax free. Decades ago, homeowners could defer the recognition of taxable gain if they bought another house, and homeowners 55 and older could exclude as much as $125,000 of gain. That was a one-time deal, so perhaps that’s what you’re remembering.

Since 1998, however, taxpayers have been able to exempt as much as $250,000 of capital gains from the sale of their primary residence as long as they owned and lived in the home at least two of the prior five years. Taxpayers can use this exemption as often as every two years.

Clearly, your mom needs to find a source of good tax advice, such as a CPA or other tax professional. If you have the authority to act on your mother’s behalf through a power of attorney or legal conservatorship, then you should seek the tax pro’s advice as her fiduciary.

Under current law, if she retains the real estate it would get a “step up” to the current market value as of her death. That means all the appreciation that happened during her lifetime would never be taxed. If she sells now, on the other hand, she probably would owe a substantial capital gains tax bill, even if she uses the exclusion. The tax pro will calculate how much that’s likely to be.

That tax bill has to be weighed against the possibility that her estate could owe taxes. The current estate tax exemption limit is $11.7 million, an amount that will continue to be adjusted by inflation until 2025. In 2026, the limit is scheduled to revert to the 2011 level of $5 million plus inflation. President Biden has proposed lowering the limit to $3.5 million and modifying the step up, but those ideas face stiff opposition in Congress.

An estate planning attorney could discuss other options for reducing her estate if she’s still with us as 2025 approaches. The tax pro probably can provide referrals.