Actions needed for tax filing status change

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beachmom
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Joined: Thu Feb 14, 2013 5:38 am

Actions needed for tax filing status change

Post by beachmom »

Edited to add the information Celia requested, additional portfolio details.
What steps do I need to take in investment allocations as a widow and prepare for filing taxes as single in 2022?
My husband died in early 2020. I am 55. For 2021 I will be able to file as qualifying widow with a dependent. In 2022 I anticipate (pray) my daughter will graduate college and I will no longer claim her as a dependent and my tax status will be single.

I have a small salary (about $50,000 annually). After taxes, insurance and 401k contributions are deducted I net just under $2000 per month and to maintain my lifestyle I need about $3000 or $3500/month for current living expenses. This bothers me, because we've never had to touch our savings before.

But thankfully I have a large amount of savings. Most of it is in taxable accounts, which generates around $20,000 to $25,000 in dividends and interest per year. With the married filing jointly status our tax rate was low (12.0% marginal in 2020, 0% capital gains). In 2022 filing single the taxes will be higher.

Emergency funds: 12 months, Additional emergency fund to with $22,000 to cover any expenses related to land I inherited.
Debt: 0, no debt (own my home with no mortgage)

529 Funds for each child and I hold a UTMA account for child still in undergraduate school. Although she is 21 yo I have not converted the UTMA status. The 529 fund and the UTMA account should pay for her last year of college. 2nd child starts graduate school in August and there is 529 money available to her. Son has some remaining money in his 529 if he elects to attend graduate school. I have no plans for additional contributions.

Tax Filing Status: 2020 MFJ, 2021 Qualifying Widow, 2022 single

Tax Rate: For 2020: 12.0% Federal marginal, 5% State

State of Residence :NC

Age:55
Current Living Expenses: About $30,000-$36,000.
Salary: About $50,000

Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 20% of stocks

Portfolio Size: low seven figures

Portfolio overall allocation 68% stocks, 32 % bonds
I cannot reach my desired allocation without paying capital gains. Every single holding in my portfolio has unrealized gains.

Taxable Account (Vanguard): 68% of total portfolio
15.8 % VBTLX Total Bond Mkt Index (Unrealized LT capital gain for this fund is $6500).
8.0 % VHYAX High Yield Dividend Index
7.7% VTIAX Total International Stock Index
24.2% VTSAX Total Stock Mkt Index
1.9% DUK, Duke Energy
1.5% JNJ Johnson & Johnson
2.5% NSC Norfolk Souther
0.7% PEP Pepsico Inc
0.7% PG Proctor and Gamble
1.6% RY Royal Bank Canada
1.0% SO Southern Company
0.3% VZ Verizon

Bank CDs
0.8%, CD paying 3.15% due June 2023
0.8% CD paying 1.25% due Dec 2025

IBonds
0.5%

Roth IRA (Vanguard): 17% of total portfolio
2.6% VWIG International Growth
4.5% VSGAX Small-Cap Growth
2.3% VBTLX Total Bond Mkt
7.8% VTSAX Total Stock MKT Index



Trad IRA (Vanguard): 8.9% of total portfolio, includes rollover trad IRA from my husband I elected to treat as my own.
4.1% VAIPX Inflation Protected Bond Index
2.8% VBTLX Total Bond Mkt Index
1.6% VTSAX Total Stock Mkt Index

401k: 5.6% of total portfolio,
0.7% 500 Index
4.9% Fidelity Advisor Bond A

New HSA fund (I wasn't eligible while on husbands insurance)
Annual Contribution $500
Employers Annual contribution $500
We will have more than this in medical expenses.

Contributions
$7000 her 401k anticipated annual contribution 15% and I can change this each quarter
$2000 Employer anticipated annual contribution 4% of salary (match 50% of first 8%)

her Roth IRA: I move the maximum $7000 from taxable to Roth every year
$0 taxable (for retirement, not short term goals)

Available funds
Funds available in her 401(k) :
FEPAX Fidelity Advisor Bond Fund A 0.75% Expense Ratio
VFIAX Vanguard 500 Index Fund 0.04% Expense Ratio
RPBAIX T Rowe Price Balance Fund 0.58% Expense ratio
NewYorkLife Anchor Acct Series I Cls 25 couldn't locate the expense ratio
There are other stock funds with high expense ratios, which I would not be interested in.


At the end of this year I plan to convert some or all of the total bond market to a tax exempt bond fund. The total taxable gain for this fund is about $6500 currently.

Questions:
Is it worth trying to increase my 401k contributions from the current 15% to a larger number? To increase 401k contributions, I would have to use even more of my dividends and interest from my taxable account for current living expenses instead of reinvesting or even sell some holdings generating taxable gains? And then I would still owe taxes when RMD starts. I currently max my Roth IRA with dividends from the taxable account. I also bought a 10,000 I bond this year.

Am I missing anything? I plan to retire sometime between age 60 and 70, probably closer to 60. Also around the time I reach age 60, my youngest kids will reach age 26 and no longer be eligible for coverage under my health insurance which currently costs me about $350/month for their medical/dental insurance.

Thanks for your help. I was the primary investment manager in the marriage, but I miss having someone to discuss this with.
Any other steps to take this year while I still have qualifying widow status?

Answers to Celia's Questions:

* Did you capture all the benefits your late husband would have been eligible for? Yes Did his accounts get a step-up in basis as of date of death? Taxable accounts were joint, not sure if Vanguard adjusted tax basis. Was he a veteran? No His 401K was sold and funds rolled into my traditional IRA, elected to treat as my own. Did he have life insurance through his employer? Yes Funds have been incorporated into the portfolio above;
* Is your portfolio tax-efficient? Are assets held in the appropriate accounts? When will you start filing taxes as Single? 2022 What accounts should be spent down first? last? Not sure
* Is there any debt to be paid off in retirement? No Will all your kids be on their own before retiring? Yes, hopefully.
* What will you do for medical insurance? I am covered through my employer with a High Deductible plan. I pay through payroll deduction to cover the kids (son has his own) Do you currently pay for it through your employer? Yes for the kids about $150/per biweekly paycheck. If I retire before age 65 I don't know what I would do.
* What income streams will you have in retirement, if any, other than SS? A small pension of $130/month from an old job. That reduces how much you have to spend from savings each month.
Last edited by beachmom on Sat Jun 12, 2021 11:25 am, edited 1 time in total.
mhalley
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Re: Actions needed for tax filing status change

Post by mhalley »

I doubt paying capital gains to move from a taxable to tax exempt bond fund makes sense at your tax bracket. I am concerned that you need to dip into savings to maintain your lifestyle at your age. To me, this means you need to decrease your expenses, unless you anticipate other decreases in expenses other than not paying you child’s health insurance.
A portfolio of “7 figures”is too vague to give adequate advice. You need to run some numbers at fire Calc, fire sim etc to see whether you are on track to retire or you need to increase your savings. https://firecalc.com/
To see whether a taxable or tax exempt bond fund is best, you need to calculate the taxable equivalent yield at your tax bracket.
https://www.bankrate.com/calculators/re ... -tool.aspx
Last edited by mhalley on Thu Jun 10, 2021 11:00 pm, edited 4 times in total.
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

Your daughter may meet the qualifying child test in 2022 by virtue of graduating in May depending on how much she earns next year.

https://www.mcg-cpa.com/can-still-claim ... ax-return/

If so, that buys another year in the MFJ status.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

You will be eligible to draw SS survivor’s benefits at 60. Have you figured out how much that will be? How much of the gap will that fill? If it fills most of the gap, then you’ll just need to draw from savings for a few years.

It is probably worth getting a desktop version of tax software to run different scenarios on 401(k), versus capital gains taxes.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
Topic Author
beachmom
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Joined: Thu Feb 14, 2013 5:38 am

Re: Actions needed for tax filing status change

Post by beachmom »

mhalley wrote: Thu Jun 10, 2021 10:56 pm I doubt paying capital gains to move from a taxable to tax exempt bond fund makes sense at your tax bracket. I am concerned that you need to dip into savings to maintain your lifestyle at your age. To me, this means you need to decrease your expenses, unless you anticipate other decreases in expenses other than not paying you child’s health insurance.
A portfolio of “7 figures”is too vague to give adequate advice. You need to run some numbers at fire Calc, fire sim etc to see whether you are on track to retire or you need to increase your savings. https://firecalc.com/
To see whether a taxable or tax exempt bond fund is best, you need to calculate the taxable equivalent yield at your tax bracket.
https://www.bankrate.com/calculators/re ... -tool.aspx
Obviously this is a concern I have too, but I don't think it's a realistic concern. The invested portfolio is 1.8 million (1,800,000). I tried the fire calc link retiring this year for 40 years and no scenario failed. Ending values ranged from > 1 million to crazy high numbers.
I am debt free, own my own home and additional land which aren't included in the 1.8 M.
Topic Author
beachmom
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Joined: Thu Feb 14, 2013 5:38 am

Re: Actions needed for tax filing status change

Post by beachmom »

lazynovice wrote: Thu Jun 10, 2021 11:51 pm You will be eligible to draw SS survivor’s benefits at 60. Have you figured out how much that will be? How much of the gap will that fill? If it fills most of the gap, then you’ll just need to draw from savings for a few years.

It is probably worth getting a desktop version of tax software to run different scenarios on 401(k), versus capital gains taxes.
I don't know how much survival benefits will be. My husband did not save his annual social security statements. (Learn from his mistake). You cannot get the information for survival benefits online. Another widow on this forum or another stated that social security would not grant her an appointment until she was within 3 years of 60, but I haven't tried. My husband was 58 when he died and worked continuously since college, but not at particularly high salaries.
pshonore
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Re: Actions needed for tax filing status change

Post by pshonore »

lazynovice wrote: Thu Jun 10, 2021 10:57 pm Your daughter may meet the qualifying child test in 2022 by virtue of graduating in May depending on how much she earns next year.

https://www.mcg-cpa.com/can-still-claim ... ax-return/

If so, that buys another year in the MFJ status.
Hope no one is using the referenced link for tax advice. It states:
to claim your qualifying child as your dependent you must have provided more than half of your child’s support for the year.
Most folks know there is no support requirement to claim a qualifying child: rather, the child cannot provide more than 1/2 of their support. Seems odd that a CPA does not know this nuance.
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celia
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Re: Actions needed for tax filing status change

Post by celia »

OP, You've given us a lot of info but there are some areas where it is vague, as in what specific assets you have in each account. For example, you want 40% bonds but we don't know if they are currently in taxable, tax-deferred, or Roths. If you follow the recommended format in Asking Portfolio Questions and update your original post accordingly, we will be able to help you easier.

Although you didn't ask about some of these things specifically, you (and we) likely want to know the following:
* What state do you live in? Do you plan to move to another state?
* What are your current living expenses? Do you expect them to be the same in retirement?
* Did you capture all the benefits your late husband would have been eligible for? Did his accounts get a step-up in basis as of date of death? Was he a veteran? Did he have life insurance through his employer?
* Is your portfolio tax-efficient? Are assets held in the appropriate accounts? When will you start filing taxes as Single? What accounts should be spent down first? last?
* Is there any debt to be paid off in retirement? Will all your kids be on their own before retiring?
* What will you do for medical insurance? Do you currently pay for it through your employer?
* What income streams will you have in retirement, if any, other than SS? That reduces how much you have to spend from savings each month.

After we have more information, some of us will likely comment on one or more of these topics as we all have different knowledge and expertise. Don't implement any suggestions until the thread dies down as sometimes two or more of us will disagree or see different reasons why something should or should not be done. If that happens, don't worry as there could be some back-and-forth conversations or requests for more info.

We want you to be comfortable in your decisions and will try to answer your questions the best we can.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

beachmom wrote: Fri Jun 11, 2021 5:25 am
lazynovice wrote: Thu Jun 10, 2021 11:51 pm You will be eligible to draw SS survivor’s benefits at 60. Have you figured out how much that will be? How much of the gap will that fill? If it fills most of the gap, then you’ll just need to draw from savings for a few years.

It is probably worth getting a desktop version of tax software to run different scenarios on 401(k), versus capital gains taxes.
I don't know how much survival benefits will be. My husband did not save his annual social security statements. (Learn from his mistake). You cannot get the information for survival benefits online. Another widow on this forum or another stated that social security would not grant her an appointment until she was within 3 years of 60, but I haven't tried. My husband was 58 when he died and worked continuously since college, but not at particularly high salaries.
I truly appreciate the heads up on saving statements. Since it is all online, we don’t tend to save them. But if one of us were to die, I bet SS turns that account off. Not something I had thought about. So thank you! I have learned a lot from widowed friends and acquaintances. If, and this is a big if, you have his earnings history, you can use one of the SSA calculators to estimate the benefits.

https://www.ssa.gov/benefits/calculators/
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

pshonore wrote: Fri Jun 11, 2021 6:55 am
lazynovice wrote: Thu Jun 10, 2021 10:57 pm Your daughter may meet the qualifying child test in 2022 by virtue of graduating in May depending on how much she earns next year.

https://www.mcg-cpa.com/can-still-claim ... ax-return/

If so, that buys another year in the MFJ status.
Hope no one is using the referenced link for tax advice. It states:
to claim your qualifying child as your dependent you must have provided more than half of your child’s support for the year.
Most folks know there is no support requirement to claim a qualifying child: rather, the child cannot provide more than 1/2 of their support. Seems odd that a CPA does not know this nuance.
Fair enough, but it was the first link I came to that was not a TurboTax user forum. But the larger point and the one that OP needs to figure out in her own case is that she may have an additional year of the MFJ status.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
RetiredCSProf
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Re: Actions needed for tax filing status change

Post by RetiredCSProf »

Your daughter may give you Head of Household status as a qualifying child (up to age 24 if a student for at least 5 months of the year) or as a qualifying relative (no age limit and need not be a student). I do not see how this would give you MFJ status beyond first year filing as a widow.
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

RetiredCSProf wrote: Fri Jun 11, 2021 11:30 am Your daughter may give you Head of Household status as a qualifying child (up to age 24 if a student for at least 5 months of the year) or as a qualifying relative (no age limit and need not be a student). I do not see how this would give you MFJ status beyond first year filing as a widow.
Qualifying Widows get MFJ for the two years after the year of death.

https://www.investopedia.com/terms/q/qu ... idower.asp

That link says the qualifying child has to have less than 4,300 in gross income. That might be a problem for a new graduate. It may also be an issue this year if the student works.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
pshonore
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Re: Actions needed for tax filing status change

Post by pshonore »

RetiredCSProf wrote: Fri Jun 11, 2021 11:30 am Your daughter may give you Head of Household status as a qualifying child (up to age 24 if a student for at least 5 months of the year) or as a qualifying relative (no age limit and need not be a student). I do not see how this would give you MFJ status beyond first year filing as a widow.
Here's what Investopedia says about QW status (which has the same tax rates as MFJ) and beats HOH
The federal qualifying widow or widower tax filing status is available for two years for widows and widowers (surviving spouses) with dependents after their spouse's death. The surviving spouse may file jointly with the deceased spouse for the tax year in which the spouse has died, and they can claim the standard deduction for a married couple filing jointly.1 For the next two tax years, the surviving spouse can file as a qualifying widow or widower if they maintain a household for the couple’s dependent children.
RetiredAL
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Re: Actions needed for tax filing status change

Post by RetiredAL »

Beach Mom.

Without knowing what your SS will be, one cannot precisely find what your Tax Rate will be at various incomes. I suspect you will be in the 22% (reverting to 24%) forever. I suggest you get familiar with the SS Tax charts in the BH wiki.

As such, be aware monies added to you 401K will likely be taxed at 22% (24%) ordinary income when you take it out.

So do not take $ from your taxable investments to supplement putting more into the 401K. Doing so will mean you are using monies subject to 15% CapGain tax, to place in the 401K, that you withdraw at 22% (24%) down the road. Not a good trade.

I think you are fortunate that you have so much $ in taxable, compared to having it in differed.
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grabiner
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Re: Actions needed for tax filing status change

Post by grabiner »

RetiredAL wrote: Fri Jun 11, 2021 1:19 pm Beach Mom.

Without knowing what your SS will be, one cannot precisely find what your Tax Rate will be at various incomes. I suspect you will be in the 22% (reverting to 24%) forever. I suggest you get familiar with the SS Tax charts in the BH wiki.
At this level, the charts are likely not necessary. 85% of the SS will be taxable, so the only effect on the marginal tax rate is the fact that the fixed amount of taxable SS could bump you into the next tax bracket.
Wiki David Grabiner
MakesCents
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Re: Actions needed for tax filing status change

Post by MakesCents »

beachmom,

My condolences.
Did you already contact social security about the 1 time death benefit payment? If not, perhaps you could contact them and ask if there is a way to also get information on what the benefit would be for survivor's benefits when you reach 60 years old.
I'm sure they are bogged down with the pandemic affecting everyone, but it might be worth a try?

https://www.ssa.gov/benefits/survivors/ifyou.html

I had just turned 60 when my husband passed, so they scheduled an appointment - I had no idea at the time of the survivor benefit.
I hope SS can help you out with an estimate, it seems a fair request.

MakesCents
Topic Author
beachmom
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Re: Actions needed for tax filing status change

Post by beachmom »

Did you already contact social security about the 1 time death benefit payment? If not, perhaps you could contact them and ask if there is a way to also get information on what the benefit would be for survivor's benefits when you reach 60 years old.
Yes I did receive do a phone interview (Covid) with them to receive the death benefit. He just said "it's not time for survivor's benefit yet.
I have some grief trauma from social security. My husband's LT disability insurance required him to apply for social security disability. I did a 2 hour interview with them to explain while my husband with a terminal cancer diagnosis and brain tumor couldn't retrain to do another job. They granted the disability status, and issued one check which I had to return when he died before the month's end.
We fortunately had good wills, medical and legal POAs.
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beachmom
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Re: Actions needed for tax filing status change

Post by beachmom »

I edited the original post with the information requested. Thanks
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teen persuasion
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Re: Actions needed for tax filing status change

Post by teen persuasion »

New HSA fund (I wasn't eligible while on husbands insurance)
Annual Contribution $500
Employers Annual contribution $500
We will have more than this in medical expenses.
If you have medical expenses, it makes sense to contribute at least enough to cover those expenses. You will be paying them anyways, might as well get the reduction in AGI (and use that tax free space for your other desired financial moves).
lazynovice
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Re: Actions needed for tax filing status change

Post by lazynovice »

beachmom wrote: Mon Jun 14, 2021 5:05 am I edited the original post with the information requested. Thanks
That step-up in basis should save you a bundle in future capital gains taxes. If you did not notify Vanguard that a joint owner had died, they may not have done it. You can check it yourself but it is easier to call them and ask if they did it. Half of your shares should have the cost basis increased to what they were as of the date of your husband’s death.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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grabiner
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Re: Actions needed for tax filing status change

Post by grabiner »

teen persuasion wrote: Mon Jun 14, 2021 6:33 am
New HSA fund (I wasn't eligible while on husbands insurance)
Annual Contribution $500
Employers Annual contribution $500
We will have more than this in medical expenses.
If you have medical expenses, it makes sense to contribute at least enough to cover those expenses. You will be paying them anyways, might as well get the reduction in AGI (and use that tax free space for your other desired financial moves).
And even if you don't, it's preferable to contribute to an HSA rather than to a 401(k) or IRA. If you use the account for medical expenses in a later year, you get a tax deduction on the contribution, tax-free growth, and tax-free withdrawals. If you don't, you get taxable withdrawals after age 65 with no penalty, which is still just as good as a traditional IRA or 401(k).
Wiki David Grabiner
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