#31 - Tax Considerations After A Death
Reluctant Executor News
Tax day is less than 2 months away. While it may be too late to make changes that affect your 2024 return, it's always a good idea to plan for the next year .
If you lost a loved one this year, you have some time to figure out how you or your family's taxes will be impacted.
LinkedIn post from December 11, 2024
What is the best end of year tax strategy?
Taxes are not probably top of mind if you lost a parent this year.
But if you did, there is a small window to save thousands in taxes for your family.
The IRS allows you to use the Married Filing Jointly status the year that a spouse dies. But after that, most people will file as Single unless they remarry.
Why is this an advantage? Much more income can be taxed at a lower rate compared to filing single.
Great, but where is this extra income?
The two biggest areas to look are at savings bonds and retirement accounts.
Cashing in savings bonds generally counts as income. If your parent is waiting until after the holidays to tackle this, the income will count toward next year, when they will have a lower tax threshold. They could potentially be paying a higher tax rate on these bonds by waiting just a few weeks.
Similar for retirement accounts. There could be opportunities to cash out a portion of the account, or convert parts of it to a Roth.
Here's an example. Supposed your dad passed away earlier this year. Your parents income was mostly through social security and a small pension. This totaled $60K this year. They also have $20K in matured US savings bonds, and $500k in a traditional (pre-tax) IRA.
In 2024 the 12% US tax bracket is $23,201-$94,300. This means that your mom could cash in the $20K in bonds and $14K of the IRA and pay only 12% taxes on it, or $4,080 in taxes.
Now look at 2025, where your mom will have to file as Single. The 12% Single bracket in 2025 is $11,926-$48,475. Suppose her income gets reduced in 2025 to $40K/year. Now, she only has about $8K of space, any income over that amount will be taxed at 22%. So if she waited to convert the bonds, she will now pay 12% on $8K and 22% on the other $12k, resulting in a tax bill of $3,600.
However, she was not able to convert any of her IRA in the 12% bracket. Converting the same $14K from her IRA at the 22% rate results in a $3,080 tax bill.
In this simple example, not accounting for deductions or other tax nuances, cashing in the same amount in 2024 resulted in a tax bill of $4,080, but waiting until 2025 resulted in a $6,680 tax bill, a $2,200 difference!
If you're in this situation, talk to a financial advisor or tax professional to better understand your options.
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LinkedIn post from March 8, 2024
We are in the heart of tax season.
Remember that a surviving spouse can claim Married Filing Jointly for the year their spouse died, but not the next year. They must claim Single, unless they are a Qualifying Widow(er).
While it might not be the most pressing thing on your mind, if you or a family member are in this situation, there may be actions you can take to minimize taxes.
Check with your accountant or financial advisor for advice.
If you don't know what assets may be impacted, or even what assets you have, it may be time to get organized.
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Coaching Support
Taxes are just one of many things your family needs to deal with after a loss. If you don't know how your family's assets impact taxes, it could cost thousands. However, the first step is to create an inventory so that you can then talk to professionals about tax implications.
Reluctant Executor offers one-on-one coaching that walks you through the types of assets you should document. By sitting down and talking through your situation, we can help make sure nothing slips through the cracks. Contact me at Bill@ReluctantExecutor.com to schedule your free consult.