Recently widowed - Tax advise

[LTWatts]

I am recently widowed and make more than would allow for survivor benefits.  In fact, I will be hit next filing year when I have to file single again.   Questions that may not be able to be answered but would appreciate it if I could get pointers to where I can get more help. 

How do you balance when to do a roth conversion vs.  taking an ACA supplement? 

When I am single and my deduction goes down?  How can I keep track monthly if my ACA is in compliance?  

How much income before you get hit with tax penalty if i am below tax withholdings (looking to retire and take income out of 401k). 

Thanks

[KarenL4]

Hi, LTWatts,

First, I am deeply sorry for the death of your spouse.  I can only imagine.  Let me do what I can to help with your questions.

When you ask about Roth Conversions vs. ACA supplement that is a complicated question that we cannot answer in specific, because we are not permitted to do calculations for you.  That said, you would want to balance the impact of what I assume you mean is the impact on taxable income from a back door roth on your modified AGI against the premium tax credit (PTC) for the ACA.  Changes to your modified AGI can change your final premium tax credit (PTC).  For many people, modified AGI is the same as AGI on your what is typically row 11 of your tax return, but you should refer to the link provided for specifics.

When considering the impact of changes to your AGI on your PTC,  you don't say what state you reside in, so I am unsure if your state has its own marketplace.  If it does, please review your state-specific website for your definitive answer.  Healthcare.gov is updating their subsidy and cost information for the coming year on November 1.  I recommend you check back at or after that date.  This page also gives you more information about income.  For 2024, here's info  that explains the federal poverty level and how it relates to reduced cost coverage for that year.

Note that the marketplace will estimate your PTC based upon your reported data and that information gets "trued up" when you file your form 1040 and include the required form 8962.  This link will tell you more about that process and this TurboTax article may also help. 

I do not know if you take the standard or the itemized deduction, so I cannot say for certain if your deduction will go down. That said, the standard deductions for various filer types for 2025 are found in this article.  Standard deductions for single people are considerably less than those for married folks.

Failure to pay tax penalties can be assessed in certain circumstances.  Here's a great article on that topic from a federal perspective.  This article also discusses how to make federal estimated tax payments.  The article is aimed at self-employed folks, but the same penalty principle applies to all filers.

The ACA knows that income changes, and they have a process for reporting those changes. You can learn more about that here.  I have generally found the agents I contacted there to be quite helpful. I hope you have the same experience.

Hope this helps.

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Regards,

Karen

TurboTax Expert

[KarenJB]

How to balance when to do a Roth conversion vs taking an ACA subsidy (I assume you meant subsidy and not supplement)?

That depends on how much of a subsidy you would be giving up versus what tax bracket you anticipate you will be in when you begin to take retirement account distributions.

Any regular retirement plan amount that is converted to a Roth IRA counts as ordinary income in the year of conversion. That should be taken into account as far as the subsidy received by your insurance company to help pay your premiums.

The single standard deduction for 2024 is $14,600; the 2024 tax brackets are as follows:

2023 tax brackets

Tax rate	Single filers	Married couples filing jointly	Married couples filing separately	Head of household
10%	$11,000 or less	$22,000 or less	$11,000 or less	$15,700 or less
12%	$11,001 to $44,725	$22,001 to $89,450	$11,001 to $44,725	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$44,726 to $95,375	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,376 to $182,100	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $346,875	$231,251 to $578,100
37%	$578,126 or more	$693,751 or more	$346,876 or more	$578,101 or more

Source: Internal Revenue Service

I would consult with your insurance agent to determine the impact various income levels would have on your ACA subsidy.

I hope this information is helpful in reaching a decision.

Regarding keeping your ACA subsidy close to the amount you should receive, I would report your new expected annual income along with your change in marital status to your state marketplace as soon as you can; that will have your subsidy amount adjusted so it’s in alignment with your new circumstances. Given that 2024 is almost over, it won’t have a big impact for the year as a whole.

The amount of the subsidy you receive is reconciled when you file your tax return to arrive at your premium tax credit based on your actual income level vs the type of plan you have. The amount your health insurance provider receives during the year to offset the cost of your premiums is an advance of this credit. So it is balanced on an annual basis rather than a monthly basis.

Regarding your last question, please keep the following in mind.

To avoid underpayment penalties, one of the following need to true:

-You owe less than $1000 when you file your tax return.

-You have paid at least 90% of your current tax liability.

-You have paid at least 100% of your prior year tax liability.

If you suspect that you may be under withholding, I recommend making an estimated tax payment to help make up the difference no later than 1/15/2025 to avoid an underpayment penalty.

I hope all of the above helps shed some light on your situation. Sorry for your loss, and the best of luck to you.