Friday, August 8, 2014

How filing taxes separately can save on taxes / the wisdom of Roth conversions and filing separately.

Dan Moisand for writes: When a couple goes from two incomes to just one, a number of planning opportunities can arise. In this week's featured question, I comment on the wisdom of Roth conversions and filing separately.

Q. Dan, In the next couple of years my wife will be retiring, I was wondering ... Can she file a zero income-tax return and convert her 403(b) accounts to Roth IRA accounts? What does she owe intaxes if she does this? Does the converted amount count as income for the year? If it does, I assume that if she keeps the converted amount, plus any other income, below the point of the 25% rate kicking in, she will owe somewhat less than 15%. I plan on doing this over about eight years (she'll be 70 then), converting all (or at least the vast majority) of her 403(b) account assets to Roth IRA. Also, can multiple conversions be put into the same Roth IRA, or does the law require each conversion to go to a separate account? Mahalo and Aloha — S.P., serving on the M/V Cape Ray
A. S.P., I googled your ship. Impressive.
Assuming no after-tax contributions were made in the past, converted amounts are added to all other income and taxed at whatever rate applies that year based on all entries on the tax return. You may choose to use separate accounts for each conversion but you aren't required to do so.
Using up as much of the 15% and lower tax brackets for Roth conversions before the onset of required minimum distributions, or RMDs, can be a good strategy if you anticipate your income to be taxed at more than 15% when she would have made distributions later. The 15% rate ends and a 25% rate starts at $73,800 of "taxable income,” income after all deductions and exemptions, for married couples filing jointly.
Most married couples file jointly because they find filing separately actually raises the total tax bill because of myriad limitations. For instance, you may find you are no longer eligible for certain deductions or credits like the tax-free exclusion of U.S. Bond interest or Social Security benefits, or the student loan interest deduction among others. Also often problematic is the condition that both spouses must use the standard deduction or you both must itemize.
Nonetheless, it is worth a look. We would run your numbers through mock tax returns to assess whether there is any advantage to you to filing separately.
Q. Dan, I read your responses on net unrealized appreciation of employer's stock. I want to make sure I still qualify to take advantage of the NUA. I retired from my company in June 2013. I turned 59 1/2 in August 2013. My company 401(k) is fully intact since my retirement and no distributions have been taken. Do I still qualify to take advantage of the NUA when I move my 401(k) to an IRA — now that it is 2014? Is there any deadline to complete the 401(k) to IRA transfer by and still be eligible for the NUA tax treatment? Or does the NUA option remain open (for years) up until I start taking distributions from my 401(k)? Many thanks for the information you provided on this topic and your response to my eligibility questions — Sincerely, J.F.
A. You should be eligible. As long as you don't make any distributions, transfers out, or rollovers until you are ready to pull the stock out, you will remain eligible. At the time of a distribution, transfer out, or rollover, you must get everything out of the plan within the same tax year.
Q. I will reach full retirement age in Jan of 2015. I am currently working part time and make over the $1,290 monthly amount Social Security allows before limiting your benefit. If I start drawing Social Security in July of this year can I set up an agreement with my employer to defer all of my compensation earned after July 1 until 2015? — Sharon H.
A. I doubt that would work easily. For purposes of the Social Security earnings test, income counts when it is earned, not when paid.
Q. Sir, I have contributed to a single member Profit-sharing plan for a number of years. In the years 2007, 2008, 2009 and 2010 I made less than the maximum allowable contributions My query is, is it too late to roll back contributions from 2008 to 2007, 2009 to 2008, etc.? My position is that if I were able to recharacterize a few years contributions I would both increase the size of my qualified retirement plan and potentially get tax rebates from a number of past year tax returns. Your assistance with this issue would be gratefully appreciated. — J.L.
A. You can make a profit-sharing contribution as late as the tax filing deadline, including extensions, for the tax year in question. Once that date passes, the opportunity to contribute is gone.
Q. My husband is already retired. I am four years younger than him. I will be retiring at 62 and he will be 66. I would like him to apply for Social Security and then suspend. I would like to apply for his benefits. Will I get half of his benefits or even less because I'm younger that 66. Thanks — P.K.
A. Because you won't be to your Full Retirement Age reductions apply to your retirement benefit and to any spousal addition. Assuming his FRA is 66 and he files or files and suspends then, when you file at 62, you will get 75% of your normal retirement benefit or 35% of his normal retirement benefit, whichever is larger.


Post a Comment