"Taxing" Situational Changes Commencing This Year

[pacific_calm]

Retired last year for medical reasons and began receiving a set retirement amount from my TSP totaling 30K annually ($2500 per month).  Taxes being held from TSP amount (22% tax bracket elected) so net is around $27K.  Also in receipt of a gov't pension from which medical, taxes, long-term disability are being withheld thus netting approximately $27K annually as well.  Beginning this year also qualified for Social Security Disability as medical disability considered total and permanent resulting in death sooner than later.  SS benefit for me is around $2600 or $32K annually.  I am 64.  With gov't retirement, spousal benefits elected; I understand spouse would also receive Social Security upon my death.  Is that a correct assumption given Spouse does work, taxes taken out of income, and plans to work at least until her minimum retirement age of 62?  She is 6 years younger; income for Social Security benefit purposes is basically equivalent to mine of later year earnings but overall she might be considered the lower wage earner taking into consideration the 36 years of earnings that Social Security calculates on.  We also have rental income of approximately $34K annually.  File jointly and do complete Schedule E but having to defer rental expenses to future years based on joint income.  No longer have dependents.  We do have individual trusts.  With this background, what might I expect from my own tax liability?  Is there something tax-wise that I am not considering or missing given what I shared above that might prove helpful to me?  Am I asking the right questions?  Have not yet opted for tax withdrawal on Social Security Disability as this is my first year as such.  Should I?  At what estimated rate/amount?  Would a better option be to file taxes separately at this point?   Divide rental income equally between us or place onto one of us exclusively?  It is understood you won't be able to provide specifics in this forum but either some general guidance/direction - or a response privately - would be appreciated.  My death is immanent and I would like to leave spouse and dependents with some better understanding/planning for the future as far as tax implications from Turbo Tax/Intuit's perspective while I can.  We do have an estate attorney but having guidance from different sources such as tax experts like TurboTax/Intuit and given we have always filed exclusively with TurboTax, hearing from TurboTax/Intuit is most appreciated.  Thank you. 

[VEpling2]

First, I am very sorry to hear about your situation.  You are asking great questions that will help you plan and prepare your family for the future.  I will attempt to cover your questions one at a time.  Please keep in mind my expertise is in taxes, but I will still try to address all of your concerns.

1. Will your spouse begin receiving your benefits upon your death?

Your wife may qualify for survivor benefits.  These benefits usually start when she turns 60.  There is an exception if your wife will be caring for a child who is under 16 or disabled.  Speaking with a social security representative would be the best option for understanding all the options for spousal benefits and survivor benefits and how they affect your wife's own benefits.

2. Would filing taxes separately be a better option?

In almost every case filing jointly will net you the lowest tax liability.  In some cases filing separately would at best give you the same tax liability.  It is very rare that filing separate is better from a tax perspective.  Filing separately does have other benefits though.  These benefits are usually for times when you need a separate accounting for your income and your spouse's income.  For example, in a divorce or when calculating repayments on loans that are dependent on your income.

3.   What is your tax liability?

That is a hard question to answer in this forum because a lot goes into calculating your tax liability.  Your wife’s income is missing from your scenario and I’m not sure I understand about your rental income/expenses.  A quick calculation that makes a lot of assumptions puts your total income at $121,200 less $25,100 for the standard deduction to equal $96,100 taxable income.  At the 22% rate this gives you around $22,200 in taxes.  Please remember this is grossly oversimplifying your tax situation though.  TurboTax has a handy tool, The TaxCaster, that can help you with estimating your taxes under different scenarios and can provide you with a more accurate estimate.

4. Should I have taxes withheld from my Social Security?  If so at what rate?

Mostly likely, yes.  You should take into consideration the withholding you already have in place, but usually adding more income means that you should also add more withholding.  The rate will depend on how much you want to owe at the end of the year.  If you want a refund you want to withhold at a higher rate.  If you are okay with owing a little, you can have less withheld.  With our quick estimate above you would need at least $22,200 in withholding to cover your taxes.  Look at your other sources of income and how much you are having withheld currently to determine if you will be short without adding withholding to your social security.  Getting a more accurate estimate would be best in this situation.  Then you can compare your current withholding with a more accurate number to see if you will be over or short.

Please do not hesitate to contact us by phone to get more information.  As you mentioned, this forum is limited in the information we can gather or share.  A phone call can give you more details and clarify some of the information I am missing.  I wish you and your family well!