Mar 14

Note – this ‘letter’ is to my mother-in-law, whom I sometimes just call ‘mom,’ even though she’s fine with my using her first name. She’s a widow, and in her 80′s.

Dear Mom,
It’s no burden for me to do your taxes, in fact, I enjoy the process. After you and dad (who passed away almost 8 years ago) told me what you were paying for your tax guy, I thought I could save you that money to spend on something else. The fact that the tax guy wasn’t really a financial planner also gave me the opportunity to offer some advice that would help save on your tax bill each year.

I just looked at the folder of paper to start doing this year’s return. Wow. A lot more than we really need. Here’s why – you don’t itemize. To take any deduction for medical expenses, you need to be out of pocket more than 7.5% of your adjusted gross income. Even though your bills feel like they were in the thousands, the amount you had for copayments didn’t even add up to $1000. Your standard deduction is $7400. Your Condo property tax and interest (you own your unit, but there’s a master mortgage on the property) along with your donations aren’t anywhere near this. A few years ago, when you had one really large donation we used a Qualified Charitable Distribution from your IRA. Since you were going to make that donation anyway, by using money from your Required Minimum Distribution (RMD), it made that distribution tax free. I thought that was pretty cool, but this year it was pages of small donations, so we agreed to pass on the QCD trick.

All in all, there are a handful of numbers to enter. Your pension, dad’s pension you still receive, social security, and the transactions from your brokerage accounts. What makes it even easier is that TurboTax (disclaimer, right here, for FTC, this is an unpaid mention) will pull the yearend data from your Schwab (FTC – ditto) account, so I don’t even type those numbers in.

The other thing I do for you is to convert a bit of you IRA each year to your Roth account. This way you pay 15% on the money, and it keeps growing tax free. If we didn’t do this, your RMDs would keep increasing each year and you might be pushed into the 25% bracket. You’re not even spending your RMD, and the girls and I keep telling you that you should spend more on yourself. But, if you need to withdraw more than your RMD and should start to hit the 25% bracket, you can use the Roth money. If I did two thing right for you, it was this – a balance of stocks and CDs so you were buying in at the bottom, and rebalancing at the tops. You have more now than you did 10 years ago, even after withdrawals. And keeping your tax rate right at 15%. This is one strategy that’s perfect for someone in your situation, just enough income to let you convert a bit each year to top off that bracket.

I hope you understand a bit better why I don’t need all that other stuff every year, but I’m pretty sure it will all be there next year when I look at your 2013 return. And I’ll explain again, ‘you don’t itemize!’

written by Joe \\ tags: , , , ,

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