Front Street Wealth Management

Fee Only, Proactive Wealth Managment

Inherited IRA, Losses and Donations

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Q: Back in 2017, I inherited an IRA from my aunt. She was 75 when she died. From all I’ve read, I think I have to distribute and pay tax on this entire IRA by the end of the 10th year after her death. I’m now doubting myself. Does the 10 year Inherited IRA rule apply to me?

A: Given the year of your aunt’s death, you are not subject to the 10-year Inherited IRA rule. Your confusion is understandable, however.

Starting in 2020, non-spousal IRA beneficiaries do only have 10 years to distribute and pay tax on their Inherited IRAs. But, for Inherited IRAs received before 2020, the old “stretch IRA” rules still apply. These rules allow you to “stretch” your IRA distributions over your expected lifetime based on an IRS mortality table. Of course, you do still have to take required minimum distributions each year, but they are based on your age.

Q: I’ve reviewed my 2023 tax return and appear to have a lot of capital loss carryovers. I’m feeling upset that my investment people didn’t use the losses by selling some of my investments that I hold with big gains. Are they totally wasting my past losses by not realizing some of my gains?

A: Don’t be upset that your investment advisor didn’t realize capital gains to use up your loss carryovers. Those loss carryovers don’t ever expire.

Because of this, other than selling them for portfolio restructuring reasons, there really is no compelling reason to realize capital gains from a tax planning perspective. Just know that when you need or want to sell those investments at a gain, your loss carryovers are available to offset your future capital gains.

Q: It appears the donations I made from my IRA were not subtracted on my recent tax return. When asked, my tax preparer told me he cannot change the information that was reported on Form 1099-R (our IRA tax form.) I’m confused. Please clarify.

A: He definitely shouldn’t ignore what it says on your Form 1099-R. That data should be entered on your tax return just as it is shown. After all, this Form 1099-R shows everything that came out of your IRA for the tax year, whether some of it was donated to charity or not. The IRS has a copy of that form and your tax return should certainly be aligned.

But, your tax preparer does need to give you credit for your IRA donations. Tax prep software has a special spot to account for your “Qualified Charitable Donations (QCDs).” When entered correctly, it will give you credit for your IRA donations and allow you to enjoy your deserved tax break.

Did Uncle Sam Get Too Much?

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You collected all those confusing tax forms. You dumped your pile of papers on your tax preparer’s lap. You even signed your tax returns. You’re done, right? Not quite yet.

Now that the chaotic rush has come and gone, it’s time for you to make sure you didn’t inadvertently leave Uncle Sam a tip he didn’t deserve. Here are three things to review that might result in some money back.

Qualified Charitable Donations (QCD): Using your IRA as a charitable donation tool is a tax-smart strategy. After you reach age 70 ½, you can donate to charity directly from your IRA without owing any taxes on the distribution. Remember, your IRA balance has not yet been taxed and Uncle Sam is waiting in the wings to get a piece of the action. However, when you donate some of your IRA to a qualified charity, it’s tax-free!

Unfortunately, it’s common for IRA donations to end up being taxed anyway. How is this possible? Because the tax form that summarizes your IRA distributions – Form 1099-R – doesn’t automatically subtract out your donations. You have to manually subtract them. If you donated some of your IRA last year, review Box 4a and Box 4b on your federal Form 1040 to see if you actually got credit for making those IRA donations.

Homestead Property Tax Credit: Some homeowners qualify for a special Michigan income tax credit that effectively rebates back some of their property taxes. If your home’s taxable value is less than $154,400 and your total household income was below $67,300, you are eligible for the Michigan Homestead Property Tax Credit of up to $1,700. Your very first step is to check your property tax bill to see if the “taxable value” of your home is below the threshold. If it is, you can then move onto step two to see if your household income is low enough to receive this tax credit.

Tax Loss Carryovers: If you switched your tax preparation software or even hired a new tax preparer last year, be sure to check that your unused tax losses were successfully carried over to your 2023 tax return. Missing your tax loss “carryovers” is especially easy to do.

To ease your mind, review your 2022 federal tax return and check for a negative figure on Line 16 on the top of the second page of your Schedule D. If you showed a loss that’s larger than $3,000, you should pull out your 2023 federal tax return. See if that negative figure was carried over onto either Line 6 and/or Line 14 on this year’s Schedule D. If your tax loss carryovers are missing, an amended federal and state tax return just might be in your future!

Tech: A Rant and a Dream

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Technology is a blessing and a curse. We’re living in a moment where these cross currents are increasingly obvious. It’s probably not a coincidence that AI is exploding at the precise moment online threats are peaking.

Long gone are the days of using paper and getting mail. Today, everything has moved online. And, accessing information online requires layers of security. The ongoing battle to keep us safe online has left many seniors in the dust. I cannot overstate how difficult technology is making things for our aging population.

Here are some examples many seniors face daily.

You get an email alerting you to a possible suspicious charge on your credit card. Did you just accidentally call a scammer, instead? You search Google to find the login page to review your money. Did you just log into a fake website and expose your login credentials? A warning about a software update just popped up on your screen. Did pushing that help button just give a criminal access to my computer? How exactly do you access that six-digit text code when you’re still talking on the phone? Why is my Face-ID not working anymore? Didn’t I use my fingerprint to login into that app before?

The worry and hassle trickles down the family tree. I’m certain I’m not the only one who moonlights as a tech support and cybersecurity consultant. Sadly, not all seniors have access to local or distant family members willing or able to help. Don’t get me started on just how difficult it is to deliver tech support on a phone.

A better solution is screaming to be created. Admittedly, it’s a pipe-dream. Nonetheless, the thought of it gives me a feeling of hope!

What’s desperately needed by seniors is a trusted team of “tech-navigators” designed to ensure online safety and minimize frustration. It’s not deep tech-support, it’s simply tech-navigation. Even so, this trusted team needs to be highly-vetted (deep background checked, not Best Buy) and endorsed by already established and trusted entities, such as local senior centers or municipalities.

Now, it certainly wouldn’t be cheap to deliver a high-quality and trusted tech-navigator service. But I sense the peace-of-mind would feel almost priceless to all concerned. I suspect family members, if needed, would help subsidize the cost. But, let’s be totally honest, the cost to protect our seniors against technology’s advances should be borne by the very businesses that benefit most from it.

At the top of this list sits big-tech, and the banks, credit card companies and brokerage firms. While they will balk, they deeply understand the phrase, “It’s just a cost of doing business!” Technology is both a blessing and a curse, yes. But, it’s also inflicting a heavy cost.

I-Bonds, RMDs and Extensions

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Q: We had some unexpected things happen in the last month. I don’t think we’ll be able to get all our tax information to our tax preparer on time. How does filing an extension actually work and what are the financial consequences?

A: Filing an extension of time to file your tax return really is a breeze. In fact, Form 4868 is officially called “Application for Automatic Extension of Time to File.” Note the word, automatic.

Remember, this is just an extension of the time to file your taxes. It is not an extension of the time to pay your taxes. So, it’s important to estimate the amount of taxes you should have paid in 2023 and send in a check to cover your full tax obligations to both the US Treasury and the State of Michigan.

Q I bought a couple of Series I savings bonds back in April of 2022 when they were promising incredible yields. But, I think the interest rate has come down a lot. What should I do now with my savings bonds?

A: Yes, a couple years ago Series I savings bonds were all the rage. With inflation spiking after the pandemic, these inflation-protected savings bonds were paying interest well above the yield you could earn in a money market fund or in a CD at your bank. We’re talking rates of about 8%.

But, things have changed. Today, money market funds pay above 5% and those Series I savings bonds that you purchased back in April 2022 are only paying about 3.4%. So, you might want to consider cashing them out. Keep in mind, though, you’ll owe federal tax on all of the interest you earned, but you won’t have to pay any state income tax.

Q: I have three IRA accounts with a number of different brokerage firms and mutual fund companies. This year, I’ve finally reached age 73 and have to start taking required minimum distributions. Do I have to take a distribution from each account?

A: To satisfy your required minimum distribution (RMD), technically you don’t have to take money out of each and every IRA in your life. You are allowed to add up each of your RMDs and then actually take the distribution from one of your IRAs. But, I don’t love this method.

Why? It requires you to keep really good records. It’s much easier to take your RMD amount for each IRA separately. Better yet, you should consider rolling over your various IRAs into one single IRA account. That way, you will have everything in one spot and only one RMD to contend with. This will make it easier for you to remember and it’ll be easier at tax time with fewer tax forms to process.

Safety and Simplification

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Q: I’m struggling with handling my finances online. My growing password list is frustrating. I know cybersecurity is important, but what can I do to make this both safe and easier for me?

A: You are not alone in your struggle. While my column a couple of weeks ago addressed scams related to fake financial websites, your question gives me a chance to reiterate and reinforce some additional safety steps.

My first suggestion is to choose a trusted person that you will always turn to for tech help. If anyone asks you to do anything online that raises even an ounce of concern, disconnect online (or hang up the phone) and immediately contact your go-to trusted person.

Next, strongly consider reducing the number of financial accounts you have. Really try to get down to one bank, one credit card and one brokerage firm. 

Finally, you should review all your online financial accounts to make sure you set up “two-factor authentication” on each of them. With this in place, when you log in, you will get a text message or an email with a unique code to get online. 

Q: Both my husband and I turn 73 this year. We have our investments spread across multiple brokerage firms. How do we best handle the required minimum distributions from all of these IRAs?

A: Now that you’ve reached age 73, and every year from this point forward, you’ll have to deal with required minimum distributions (RMDs.) Unfortunately, it’s now time for the government to finally get their tax revenue.

Your RMDs amount will change each year based on your age and the market value of your IRAs on the last day of the prior year. Don’t worry about having to do the calculation each year. Your brokerage firms will inform you of the new RMD amount each year. It’s usually published on the back pages of your IRA statements. 

While most people tend to take each RMD amount from each of their individual IRA accounts, you are allowed to add up all of your RMDs and take out that amount from just one of your IRAs. Regardless of how you end up handling it, the key thing is to not forget an account!

But, my default advice is to consider consolidating your IRAs. It will save you effort and will reduce the chances that you overlook your RMD. It also creates less work for you and fewer tax forms to gather and process next year.

Of course, while you are both alive, your IRAs and your husband’s IRAs will always remain separated. After one of you dies, you can then consolidate them.