Hello, My mother (70 yrs) has closed her 401k and deposited 40k. She lives solely on Social Security,12,600.00 per year. Is there a way to calculate taxes she may owe?

[xmasbaby0 · Accepted solution]

Why did she cash out the whole retirement account at once?  Has it been more than 60 days since she did that?  If not, she could still roll it over into another retirement account.  That is going to make her Social Security income taxable and she is going to be taxed on the whole 401k distribution at tax time for her tax bracket which looks like 22% if she is single.  

In January she will receive a 1099R that has to be entered on her 2019 tax return, along with the SSA1099 she will get for the Social Security she receives.

TAX ON SOCIAL SECURITY

Up to 85% of your Social Security benefits can be taxable on your federal tax return.  There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits.  When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable.

 What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit. (For 2017 that limit is $16,920 —for 2018 it will be $17,040—for 2019 it will be $17,640)  After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare.

https://ttlc.intuit.com/questions/1899144-is-my-social-security-income-taxable

You need to file a federal return if half your Social Security plus your other income is $25,000 when filing single or head of household, or $32,000 when filing married filing jointly, $0 if you are filing married filing separately.

Some additional information:  There are 13 states that tax Social Security—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.  These states offer varying degrees of income exemptions, but four mirror the federal tax schedule: MN, ND,VT, and WV

@dmertz  Any thoughts?

[financial]

Thank you for the response.
I thought her tax bracket would be lower due to her living solely on Social Security.

[financial]

Thank you for the response.
I thought her tax bracket would be lower due to her living solely on Social Security.

[dmertz · Accepted solution]

Begin age 70, single and having no other income,  $40,000 of ordinary income plus $12,600 of Social Security income would result in the full 85%, $10,710 of Social Security income being taxable.  With no deductions other than the standard deduction, the federal tax liability for 2019 would be $4,231.  The marginal tax rate on the ordinary income at the level in this scenario is 12%.

If the full $40,000 is not needed for expenses this year and she is still within the 60-day rollover window, rolling over $26,400 to a traditional IRA would reduce the 2019 tax liability to zero.  If the tax rates remain essentially the same over the next few years and the Social Security income remains the same at $12,600 per year or so, the $26,400 could be distributed as $13,200 in 2020 and $13,200 in 2021, also with zero tax liability.  The net result over the three years would be a federal tax savings of $4,231.  Rolling over less than $26,400 would expose some of the of 401(k) income to marginal tax rates as high as 22.2% due to the multiplying effect of increasing the amount of Social Security income that is taxable.

Don't forget about state taxes.

[financial]

Thank you so much! She is within the 60 day window and will visit her bank tomorrow.
You are a Godsend, bless you!