Adding to the emotional pain that a client endures after losing their spouse, financial pain can further deepen the loss: Taxes go up while income goes down; their Medicare premium increases; and the following year, filing as a single taxpayer, deductions are reduced.
“Just think how cruel the widow tax is,” John Iammarino, president and founder of Securus Financial, tells ThinkAdvisor in an interview. “You’ve lost your soulmate … and all of a sudden you get a huge tax surprise.”
Iammarino, a retirement management advisor specializing in advanced retirement planning, puts an emphasis on tax planning to control tax liability.
Surviving spouses are particularly hard-hit taxwise when they’re left with a large amount of tax-deferred assets, he says.
In the interview with Iammarino, a CFP’s son and former police officer who launched his practice in 2012, he also discusses the alternative minimum tax system and state and local tax deductions, and he explains how to create a temporary “paycheck” to delay starting Social Security benefits.
Here are highlights of our conversation:
THINKADVISOR: What’s your approach to financial planning?
JOHN IAMMARINO: We try to look at all aspects of what’s going on in the clients’ lives and try to get ahead of things before catastrophes happen.
Everything goes back to giving the clients peace of mind.
I tell them we can’t control the market, but to a certain extent, we can control their tax liability. You can do that by planning, and avoid tragedy that could become hardships both psychologically and financially.
When a woman becomes a widow, she pays more in taxes. Please explain why.
Just think how cruel the widow tax is: You’ve lost your soulmate and are grieving; and now, just when the dust has settled a bit, all of a sudden, you get a huge tax surprise.
Which is?
[For example], people who don’t do tax management, when their spouse dies and leaves them with a lot of tax-deferred money, they find that that entire tax liability now becomes theirs. That’s where you see taxes shoot up.
What else happens financially?
A pension may be cut in half. One Social Security check goes away: The surviving spouse gets to keep the larger of the two.
A fundamental problem with the widow tax is that when the spouse dies, they still have a mortgage to pay [off].
For a spouse that has a brokerage account, which is taxable, if they take ownership of their spouse’s IRA or keep it as the beneficiary, there are a lot of things that go into this and managing the step-up in basis.
The widow perhaps may be able to live off the capital gains rates versus ordinary income rates, which are considerably lower.
What will change about her tax return?
If you have a spouse with health problems, that should be a key factor in planning; because when they die, you’re able to file married jointly for only one year, the year of the spouse’s death.
Then you go into single filing status, which means your deduction gets cut in half and you start to skyrocket through a bunch of different tax areas.
Also, your Medicare premium, as they call it — I call it Medicare tax — goes up, maybe, over $100 a month. So that’s another $1,200 a year in taxes.
How else are a widow’s finances affected?
Studies show that your expenses don’t go down that much when a spouse dies.
For example, if the husband was doing all the electrical and plumbing repair work, and the widow doesn’t know how to do that, she must hire people and pay thousands of dollars to get things fixed.
What’s a good strategy for any client wanting, but willing to wait, to start collecting Social Security benefits?
A lot of people want to get that check because it’s a paycheck. And they want to collect it even if it’s to their detriment.
But we show them that we can generate a temporary paycheck by utilizing some of their IRA assets, spending that down, doing Roth conversions and then maximizing their Social Security income stream.
One of my clients who did that, instead of starting Social Security at 65, when they were a couple of years into their 70s, got their provisional income below the $44,000 threshold. So they’re subject to only 50% of their Social Security benefits being taxed.
The reductions made possible by the Tax Cuts and Jobs Act of 2017 are due to expire at the end of this year. What scenario do you see if they aren’t extended?
Regardless of whether they’re extended or not, we’re still at a historically low tax rate. If we revert, the itemized deductions are going to return. Some may enjoy that [in connection] with charitable deductions that are allowed.
Please discuss the alternative minimum tax system and why it’s important.
That’s a whole other tax code. A lot of people aren’t paying attention to it, but it affects many.
Before the Tax Cuts and Jobs Act, about 5 million taxpayers were subject to the AMT, but the Act took the number of taxpayers down to 200,000.
If [the AMT change] isn’t extended, it could mean a big hit for the upper-middle-class portion of the country, about 4.8 million taxpayers.
I’d also like to see some reconsideration of other elements, like the SALT deduction, capped at $10,000.
That [limit] is set to expire at the end of this year, too.
Before you became a financial advisor, you were a police officer for 20 years. Because of on-duty back injuries, you medically retired. Has that career helped you as an advisor?
Yes. I learned every day how you could wake up with the sun shining; but by the end of the day, your world could be turned upside-down.
So one of the greatest skill sets that job gave me was to think about the unthinkable and have a plan for it.
If the market goes down, there’s always opportunity [to invest]. The ultra-wealthy look at it that way.
For instance, you can use a downturn as a way to maximize your Roth conversion for future growth.
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