Man, the Social Security laws are written to screw you if

[sinkingfeeling]

you happen to inherit some money. In 2018, in accordance with my sister's trust, we had to cash in her IRA and the proceeds went into the trust. Since I received 50% of the trust, I had to pay like $14,000 in federal taxes on $53,000 in additional income. Fine, I get that.

But I get a letter from SS and my part B Medicare for 2020 will be double the $144.60 premium based on my one-time income jump. Their letter says you can ask for a review if your normal income is lower based on 5 or 6 circumstances. It states, "We cannot make a new decision if your income changed for a reason other than those listed above, such as receiving one-time income from capital gains."

So, for the next year, I will pay $289.20 per month for Part B.

Be forewarned.

[virgogal]

1. Good lord,I was completely unaware of this type of thing.

[badhair77]

2. Since this was a non recurring event can you appeal and have it lowered for 2021,

since your income will return to a lower amount? It’s irritating how they get you at every turn.

[sinkingfeeling]

3. It will go back to whatever 2021 premium will be based on this

year's income.

[Sherman A1]

4. I wonder if that applies to those over 70.5

who have to take the RMDs from their IRA's & 401ks?

[sinkingfeeling]

5. If those RMDs raise your income above $87,000 (single) or

$174,000 (married), then your Part B goes up. The max is like $491.60 a month at $500,000 a person or $750,000 a couple.

[Sherman A1]

6. I should be well under those numbers, but it still sucks

[unblock]

7. not at all a tax or estate planning expert, but i thought the estate pays all taxes

plenty of room for me not to fully understand tax law here or your particular situation, but my understanding of a typical inheritance is that the estate pays the taxes and the recipients get their distribution out of the after-tax funds without having to pay any further taxes.

is this then even reportable income for the beneficiary? i wouldn't have thought so...

[Pobeka]

8. I think unblock is right. Though I'm not a tax person either, so get expert advice...

I would think that the cashed out IRA would show up as income *to the estate*. The estate would report it as income and pay taxes. For the one inheriting the post-tax estate, if the amount is less than (3 million IIRC), you don't even need to report your portion of the inheritance for federal tax purposes.

Both my parents passed away a few years ago, and the only thing I have to report is an inherited IRA, which I still recieve a distribution from every year.

[msongs]

9. ss routinely cheats other groups of ppl as well nt

[KPN]

13. Not SS, but our past congresses and presidents

who passed laws that were intended in part to “fix” the purported future insolvency issue ... errr, fraud. In essence, austerity measures that even Dems bought into. Don’t blame SS folks. They’re just implementing the code.

[progree]

10. Medicare premium surcharges is one of the stealth taxes that go up as AGI goes up

Here's a good article on the Medicare premium surcharges and their history (which has bipartisan parentage).

Medicare’s Income-Related Premiums Under Current Law and Changes for 2019 (Part B and Part D Medicare Premium Surcharges), Kaiser Family Foundation, 10/31/18

https://www.kff.org/medicare/issue-brief/medicares-income-related-premiums-under-current-law-and-changes-for-2019/


The Medicare part B and part D premium surcharges are two of what are called the stealth taxes -- where your actual marginal rate is higher than what the regular income tax tables show.

Another is taxation of Social Security benefits -- as your income goes up, more of your Social Security benefit is taxed. I'm at the maximum in this regard: 85% of my Social Security benefits are added to my taxable income. And more and more people each year are getting more and more of their Social Security benefits taxed, because the IRS doesn't adjust the income thresholds for inflation.

This Social Security tax calculator determines the amount of your Social Security benefits that is taxable

. . . http://www.calcxml.com/calculators/how-much-of-my-social-security-benefit-may-be-taxed

For both these stealth taxes, the income that matters is AGI - Adjusted Gross Income. Capital gains and qualified dividends are counted the same as other income in determining the AGI. And yes, IRA Required Minimum Distributions, or any IRA distribution where one moves money from an IRA to a regular taxable account (or just plain cashes out) is part of AGI too.

Another stealth tax -- for those who are lucky enough to be able to itemize deductions -- only medical expenses above 10% of AGI are deductible. Thus as your AGI goes up, the medical expense deduction goes down (assuming any of it is deductible in the first place).

And another: the foreign tax credit is also tied to the AGI.

On inherited IRA's - My sister and I inherited an ordinary traditional IRA that my parents set up in a trust before they passed (the last one passed in 2004). We split the account and were each able to roll that over into our own individual Beneficiary Designation Account IRA (BDA-IRA) where we only have to take Required Minimum Distributions (RMDs) based on our ages. (We were, and are, both under age 70.5). So there isn't a big tax hit in one year, but rather smaller ones each year spread over our remaining life expectancies (sort of).

In the initial year we had to look up the divisor to use from an IRS table, based on our ages. For me, the divisor was 29.6. Meaning that in the first year I had to take a distribution of 1/29.6 = 3.38% of the end-of-year account's value. So if the account value at the end of year was $100,000, I'd have to take an RMD distribution of $100,000/29.6 = $3,378.

Each year thereafter, the divisor decreases by one. And each year I have to take an RMD distribution calculated as end-of-year account balance divided by Divisor.

In 2018 the divisor was 16.6, meaning I only had to take 1/16.6 = 6.02% of the account's value as an RMD distribution in 2018.

I'm surprised to hear that yours was all distributed and taxed in the first year. If one screws up, one has to RMD it all in 5 years. I've never heard of being forced to RMD it all away in one year.

A great resource of really knowledgeable helpful people about IRAs -- at least the last time I used it which was more than 10 years ago -- is irahelp.com

[sinkingfeeling]

11. I had no IRA to roll the cashed out one into. I also was already

retired.

[progree]

12. A person can be retired with no IRA and get a BDA-IRA set up.

Last edited Wed Dec 11, 2019, 10:35 AM - Edit history (2)

In fact, you wouldn't have wanted to put the money in a regular IRA if you had had one, that would have been an illegal move. Inherited IRAs must be placed in a BDA-IRA account which is unlike regular conventional IRAs.

It is never a good idea to cash out an IRA and then roll it over into another IRA. There's a 60 day rollover window and other ways one can mess up. It should always be done via direct transfer from IRA account to IRA account, or in this case, from IRA account to BDA-IRA account. The new IRA account that is being transferred to can be a new empty one (zero balance) until the transfer occurs. As they were in my and my sister's cases.

The tax deferral benefit of an IRA is awesome. Although unfortunately now that it has been done (the IRA has been distributed from a tax standpoint, i.e. transferred to a regular taxable account), there's no way the IRA will let that be reversed and redone. At least from everything I've read, there are no do-overs. But oh well, it's done and you've paid the taxes and don't have to fiddle with the RMDs and bookkeeping every year.

I was very fortunate in that Fidelity (where my parents' IRA account was) sent us an excellent booklet on how to handle inherited IRA assets. We (my sister and I) were also fortunate in having good tax advisers. I had also recently read one of Ed Slott's IRA books. And then there was (and is) irahelp.com

[PoindexterOglethorpe]

14. The problem seems to be that your sister's trust required you to cash in her IRA.

So you got a huge amount of money all at once.

While normally the estate pays all taxes before money is distributed, this is somewhat different, a cashing in of an IRA. The taxes you subsequently owed were because of your increased income, yours, not anything to do with the estate.

I know, it sucks to have to pay the extra Medicare amount. That happened to me my first year on Medicare, because of selling some investments of my own.

You might want to try appealing anyway.

One consolation is that you should still have over $30,000 from that IRA after the taxes and even after next year's higher charge on Medicare. Which is a tidy sum of money that you can enjoy.

[sinkingfeeling]

15. You are correct.

[progree]

16. Why would any competent estate attorney write a trust that REQUIRES the liquidation of an

Last edited Tue Dec 17, 2019, 04:59 PM - Edit history (1)

IRA? Sounds like a DIY job (perhaps assisted by unqualified people) either on the writing of the trust, and/or the execution of it that predictably didn't turn out well. It is never ever ever a good idea to liquidate an IRA all at once in its entirety, because every dime of the IRA's value becomes taxable income in that year, pushing up one into higher tax brackets, and triggering one or more high-income stealth taxes, as we've seen in this thread and the earlier one at https://www.democraticunderground.com/11211589

[PoindexterOglethorpe]

17. That may likewise be true.

Too many people don't have a will in the first place. Even a simple one should be written by an attorney. And don't just find one by looking through the yellow pages. Ask people you know if they have a will and who did it for them.

This goes even more if you're going to set up a trust. You really, really need that done right. And a trust will cost more than a simple will. But it's worth it. I know.