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IRA withdrawal in 2016 vs 2017

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  • IRA withdrawal in 2016 vs 2017

    My mom is retired and gets social security, a small pension and takes IRA withdrawals. With her itemized deductions, she pays no taxes. She wants to take a lump sum out of her IRA for home renovations in the range of $20,000. She can take $2,000 without her having to pay taxes, but the rest will be taxed. Would it be better to take the whole amount out this year and pay 10% tax since the Trump tax plan proposes a low tax rate of 12%? I know there are other changes he proposes to the standard deduction and personal exemptions. Is it likely that a new Trump tax plan would be effective in 2017?

  • #2
    While I do believe we will have changes in place for tax year 2017, nobody can really predict what will happen, so take this advice with a grain of salt:

    Trump is pushing for a minimum rate of 12% but a standard deduction of $15k. At the same time, he proposes eliminating the personal exemption. If this went through, it would give your mom between $4,000 and $4,500 of additional untaxed space over a standard deduction. Without knowing how much she has in income and itemized deductions, it's impossible to know which is better. In addition, if she has $18k of taxable income, only $9,275 will be taxed at 10$ before she moves to the 15% bracket.

    Of course, you've also got to take into account that taking the full $20k at one time will probably cause her SS to be taxed at a higher rate than it currently is, and I don't know enough to calculate that, either. No idea if that law will change and how. You might want to calculate the difference if she takes only enough to pay 10% this year.

    Sorry this is kind of a stream-of-consciousness reply - i just typed my thoughts as they came to mind and didn't organize much.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Yeah #1 - is she really itemizing?  Or is she taking the standard deduction?

      And #2, repeated, nobody really knows what 2017 will hold.

      But, in general, it is better to defer your taxation.  If she takes a small distribution now, and a bigger one in January, she would in theory have a year to figure out how to handle the increased tax burden incurred in 17.

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      • #4
        Some additional details in case it's helpful. Based on 2015, social security income (US + Canada) is approximately $30K. Her pension is $3K. She had self employed income of $2K. She takes $12K from her IRA. Her itemized deductions were $18K (RE taxes, mortgage interest, charitable donations). She is single. (Looks like she paid a couple hundred dollars of taxes last year for SE tax and income tax after all).

        I do know that the social security income gets taxed differently and have a spreadsheet built where I can run some numbers. Of course no one knows what 2017 will hold, but I'm leaning toward taking out whatever I can within the 10% tax bracket

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        • #5
          If the 10% bracket hit is palatable to her, then that sounds like a smart move.

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          • #6




            Some additional details in case it’s helpful. Based on 2015, social security income (US + Canada) is approximately $30K. Her pension is $3K. She had self employed income of $2K. She takes $12K from her IRA. Her itemized deductions were $18K (RE taxes, mortgage interest, charitable donations). She is single. (Looks like she paid a couple hundred dollars of taxes last year for SE tax and income tax after all).

            I do know that the social security income gets taxed differently and have a spreadsheet built where I can run some numbers. Of course no one knows what 2017 will hold, but I’m leaning toward taking out whatever I can within the 10% tax bracket
            Click to expand...


            She would owe a little over $2,000 (including SE tax) with part of her income taxed in 15% bracket. I'd recommend taking only enough in December to max out the 10% bracket and the rest in January. According to this calculator, her SS will not be taxed even if she takes the whole $20k this year.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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