As an investment adviser,
But last year, after turning 70 1/2 and taking his first required IRA distribution, he revised his advice. That’s because his federal tax bill jumped from
How does a senior in the 15 percent tax bracket wind up paying a 30 percent tax on his IRA distribution?
“It’s totally contrary to what the IRA was set up for,” Malling says. Malling and millions of other seniors are falling victim to tax-code wrinkles that essentially cause a higher percentage of their
“You essentially torpedo your Social Security,” said
This “Social Security tax torpedo” — really more of a bubble — stands to nick more retirees as each year passes. But it doesn’t get much attention, for several reasons.
It’s complicated to understand and explain. It generally doesn’t hit until you’re 71. It affects the middle class, not the wealthier clientele of financial planners and CPAs, who would have the industry lobbyists and assets to make noise. And the strategies to avoid it require us to overcome our own behavioral impulses and ignore a mantra peddled for years by the finance industry.
“Everybody says, ‘Well that can’t be right,’ ” says Malling, who also ran his own financial-services software firm. “I mentioned it to my poker group and they said, ‘You must’ve really screwed up your taxes.’ ”
We’ll cover strategies to deal with this next week. For now, I’ll try to explain the torpedo as well as I can.
First, understand this: Uncle Sam taxes
About two-thirds of
The remaining 16 percent are just at the cusp of the threshold. For this group of people, the required minimum distributions can quickly change their tax bill.
At certain (and relatively low) income levels, every
“Instead of having to pay tax on
That’s what happened to Malling. His
Looking at it another way, when taxpayers fall within range of the torpedo, their tax rate suddenly increases by as much as 85 percent. So people in the 15 percent tax bracket suddenly sees their tax rate on their IRA income jump by 85 percent, to 27.8 percent.
These retirees are middle- and upper-middle income Americans whose benefits might previously have escaped tax. They’re essentially phasing into the
The ranks of those affected will grow in the years ahead, not only because the first baby boomers aren’t yet 71, but also because the income thresholds I referred to earlier aren’t adjusted for inflation, so they snag more taxpayers each year.
Malling’s case was slightly worse because of other cascading effects. Malling and his wife deduct a sizable chunk of medical expenses. Because of the way that particular deduction works, when his adjusted gross income jumped, the amount of medical expenses he could deduct fell. As a result, his
It also slightly increased his
How can you tell if this affects you? It’s difficult to tell because the torpedo’s range varies based on the size of your
Seniors with between
Singles with between
As you see, it can be tough to estimate if you’ll get caught. You have to do some careful projections, probably with the help of software or a professional.
Meyer’s company generates written estimates online for between
You can also meet with a licensed tax consultant, CPA or financial planner who does tax projections or tax planning and is familiar with the issue.
See Money, C2
Continued from C1
|Copyright:||(c) 2014 Oregonian Publishing Co.|
|Source:||Advance Publications, Inc.|