A Time to Give
DEATH AND TAXES are inevitable—and, as I keep getting reminded, also inextricably entwined.
I’m not so fortunate that I need worry about federal estate taxes. That privilege belongs to those who die with $13.61 million in 2024. But that doesn’t mean the taxman isn’t hovering over my demise, raising a host of lesser issues.
Paying the piper. Over the past few years, my focus has been on making big Roth conversions while staying within the 24% federal income-tax bracket. The goal: Build up my Roth and then bequeath it to my two children, while also shrinking my traditional IRA, so required minimum distributions in my 70s and beyond wouldn’t push me into a much higher income-tax bracket.
This year, I’m still aiming for the top of the 24% tax bracket—but I’m not planning any more Roth conversions. Instead, given my cancer diagnosis and likely short life expectancy, my new focus is on making gifts to my wife Elaine, my two children and my two grandchildren. Federal estate taxes may not be a worry, but Pennsylvania’s inheritance tax is. The latter isn’t an issue for Elaine, because spouses are exempt. But it’ll nick 4.5% out of any money I bequeath to my kids and grandkids.
The inheritance tax could also take a bite out of the money I give them now if I don’t live at least a year after making those gifts. That creates an incentive to give away money as soon as possible, and I’ve been doing just that. How much could I give? In the past, I've been guided by the gift-tax exclusion, which is $18,000 in 2024.
That's the amount anybody can give another person each year without filing a gift-tax return. Anything above that sum gets deducted from the sum you can bequeath free of federal estate taxes, and would necessitate filing a gift-tax return. But given that I won't be bequeathing anything close to the $13.61 million federal estate-tax exclusion, gifting more than $18,000 is no big deal.
The money I’m giving away is coming from a mix of my earned income and withdrawals from my traditional IRA. I have roughly 10% of my overall IRA—both Roth and traditional—in bonds, and I’m dipping into those bonds to make gifts. I may also sell some bonds to cover living costs if my earned income is less than I expect or if our travel expenses prove greater than I imagine. In my mental accounting, I’m free to use this bond-market money during my lifetime.
Passing it on. The other 90% of my overall IRA—again both Roth and traditional—is earmarked for Elaine and the kids, and that money is entirely in stocks. While my time horizon is now short, that of my beneficiaries hasn’t changed. Fingers crossed, they should have plenty of time to ride out any stock market downturn and notch handsome gains.
Elaine will be able to treat my IRA as her own and draw it down over her lifetime. Meanwhile, my two kids will be required to empty the IRA money they inherit over 10 years. Hannah and Henry will also owe Pennsylvania’s inheritance tax on the money.
All the money for Elaine is coming from my traditional IRA, while my two children will get my Roth accounts, plus a portion of my traditional IRA. Why earmark the entire Roth for Hannah and Henry? All their withdrawals will be tax-free. That means those withdrawals, when layered on top of their earned income, won’t push them into a higher tax bracket.
I briefly pondered withdrawing from my Roth and giving the money to the kids now. If I live a year after making those gifts, they'd avoid the Pennsylvania's inheritance tax. But the fact is, even a modest amount of tax-free growth would pay for the inheritance tax, so it's better to leave the Roth untouched and let the kids empty the account.
The IRS recently issued rules compelling some IRA beneficiaries to empty the accounts gradually over 10 years, but those rules won't affect my kids. I’ve told Hannah and Henry they should delay tapping the Roth until near the end of the 10-year withdrawal period, so they squeeze the most out of the tax-free growth. Meanwhile, my kids should probably draw down the traditional IRA slowly over the 10 years, so they spread out the taxable income, plus they can use their withdrawal in the year after my death to pay Pennsylvania’s inheritance tax.
Do I now regret my earlier Roth conversions, and the big tax bills I paid as a result? Far from it. My best guess is that the tax arbitrage has worked in my family’s favor, meaning the tax rate I paid on my Roth conversions is less than what my children would now face if I hadn’t made those conversions, and they were instead looking at emptying a big traditional IRA.
Taxing matters. Readers might recall that, back in 2015, I wrote a mortgage to help my daughter purchase her current home. In July, I forgave the loan. That loan forgiveness is potentially subject to the state’s inheritance tax if I don’t live at least a year after making that gift. Still, I’m assured the forgiven loan won’t be considered taxable income for Hannah—something that could happen if, say, you’re drowning in credit-card debt and persuade your card company to forgive that debt.
That brings me to two other tax issues—one I’m no longer focused on, one that could be an issue. The new non-issue: the Medicare premium surcharge known as IRMAA, or income-related monthly adjustment amount. Before my cancer diagnosis, I’d planned to limit my taxable income starting in 2026, when I would turn age 63. Why? My IRMAA surcharges two years later, when I’m 65 and qualify for Medicare, would be based on that income. But now, it’s unlikely I’ll live that long.
Meanwhile, I’ve been assiduously tracking my medical expenses this year, thinking I’d be able to deduct them on Schedule A. But at $29,200, the standard deduction for a couple is sufficiently high in 2024 that I now suspect I won't have enough itemized deductions, especially given that my health insurance has a $5,800 out-of-pocket maximum and given that these expenses are only deductible if they exceed 7.5% of adjusted gross income. Still, that relatively low out-of-pocket maximum is a godsend. I hate to think how much I’d be paying out of pocket if my cancer treatment was happening before the 2010 passage of the Affordable Care Act.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.The post A Time to Give appeared first on HumbleDollar.
