Does Taking RMDs Require to Filing Tax Return?

[Bonny]

Hi Everyone,

This is a follow up to my earlier question about my Dad's situation listed in the Lump Sum Pension Question.

If he can take the approximate 16k in a rollover IRA option I understand that because he's 78 he will need to RMDs, presumably starting in 2014. Currently he does not file tax returns because is income is only $13,800.

My guess is that he will need to file a tax return in 2014 because of the rollover. But I'm concerned about the on-going expense moving forward. If he starts taking RMDs will he need to file tax returns? His income should still be pretty low. Based on the IRS RMD schedule in 2015 he should take about $800. Add in the pension payments of approximately $1200 and his total income will be about $15,800.

[Bonny]

Jun 17, 2014 10:32:39 GMT -5 @patstab said:

Just supposition, but if he did not file how would the IRS know he the RMD?

If his income is no higher then that why not just take the pension, pay taxes on it the first year and go on. It would be $29000, I have no idea how much tax on that but it couldn't be much, seems like a lot less filing issues also. I understand what you are doing.

The $16k lump sum will affect his benefits under medi-CAL (CA's Medicaid program). I'm still in the middle of researching his options. With so little income and no assets every little bit helps.

[Bonny]

After poking around on the IRS.gov website it doesn't look like he would need to file a return based on the projected amount of income. His SS will remain tax free but as @patstab points out how would the IRS know that he took the RMDs? I'm guessing that if there's no requirement to file, that he'll be fine in the case of an audit as long as he keeps his bank records showing he took them.

[vonna]

The IRS will know he took RMD's because the financial institution that holds his retirement account is required to send out a 1099-R to both your dad and the IRS to report the distribution.

Still, if his income is low enough he is not required to file, but will want to keep the documentation in case the IRS sends him a letter.

[Bonny]

Thanks vonna, that was helpful!

ETA: And as follow up, I'm thinking that the conversion from lump sum payment to IRA would also not require filing a tax return although it would be "reportable". Or is that just wishful thinking on my part?

www.irs.gov/taxtopics/tc413.html

[NoNamePerson]

Did you poke around on state site if he lives in a state that has income tax. Might help to know if he needs to file state return. Just a suggestion.

[Bonny]

Jun 17, 2014 17:13:15 GMT -5 NoNamePerson said:

Did you poke around on state site if he lives in a state that has income tax. Might help to know if he needs to file state return. Just a suggestion.

Good question so I checked. Taxable Gross income needs to be $21k or higher. Even if they count SS he's still way below the threshold.

[NoNamePerson]

Glad to hear that. Sounds like you've pretty much covered all your bases then.

[TheOtherMe]

I would suggest filing a return the year of the rollover if that is what is done.  He would be pretty much guaranteed a letter from the IRS, even if it gets coded correctly.  

With RMDs that small (my parents have said they go up each year because your life expectancy is less), he probably would not receive any love letters from the IRS.  Just keep the forms in case he does receive one.

[Bonny]

Jun 17, 2014 21:53:48 GMT -5 TheOtherMe said:

I would suggest filing a return the year of the rollover if that is what is done.  He would be pretty much guaranteed a letter from the IRS, even if it gets coded correctly.  

With RMDs that small (my parents have said they go up each year because your life expectancy is less), he probably would not receive any love letters from the IRS.  Just keep the forms in case he does receive one.

Yeah, I was thinking about that since the IRS.gov reference said it was reportable. Can that be done on the 1040 or is there another form?

The dollar amount of RMDs will also depend a lot on the investment return. Since he has so little I want to keep some of it fairly liquid in case he needs it but given his mom lived to 86 he probably has a good chance of living into his mid 90s. He made some crack about taking his girlfriend to Hawaii and I told him if he did that he'd lose his medical coverage.  I hate to be the Debbie downer but sometimes I just shake my head and think there's a REASON you're in this situation.

[vonna]

Bonny -- yes, it can be done on the 1040.  And, I agree with TheOtherMe that filing may be simpler in the long run, even if no taxes are due.

I'm sure there are volunteer tax preparers in the area your dad lives in that could do it for him quickly and for free next tax season.   

[NoNamePerson]

Ok, I'm asking a really dumb question here so just shake your head and say "bless your heart" but here goes.

Why will he lose his medical coverage if he takes his GF to Hawaii? Are you talking about moving to Hawaii or just going for a visit? I travel and I don't lose my medical coverage - well I think I don't have coverage when I leave the country - got to check on that since planning trip for next spring. Just curious.

[Bonny]

OK I AM shaking my head HI is "in the Country"

Dad has to keep his income at $1203/mth or lower to maintain his all inclusive Medi-CAL benefits (CA's equivalent to Medicaid-not Medicare). This is an income-based benefit  based on a % of the Federal Poverty level. The only allowable reductions to his income are supplemental insurance premiums. So if he were to take 3k of his pension balance as an RMD it will increase his income over the all-inclusive Medi-CAL limit. One he's over the limit he has to participate in a Medi-CAL cost sharing which means paying premiums and co-pays. Given his existing health issues the premiums and co-pays, including drugs could exceed the cost of his trip. 

And technically you're right; he doesn't lose (all of) his coverage but he doesn't maintain his existing level of coverage. Right now Medi-CAL pays for all of his premiums and there are no co-pays other than certain drugs. And for a 78 year old man with diabetes and vision problems (and total assets of only $2000!) it's a very valuable program.

[NoNamePerson]

Jun 18, 2014 18:49:26 GMT -5 Bonny said:

OK I AM shaking my head HI is "in the Country"

Dad has to keep his income at $1203/mth or lower to maintain his all inclusive Medi-CAL benefits (CA's equivalent to Medicaid-not Medicare). This is an income-based benefit  based on a % of the Federal Poverty level. The only allowable reductions to his income are supplemental insurance premiums. So if he were to take 3k of his pension balance as an RMD it will increase his income over the all-inclusive Medi-CAL limit. One he's over the limit he has to participate in a Medi-CAL cost sharing which means paying premiums and co-pays. Given his existing health issues the premiums and co-pays, including drugs could exceed the cost of his trip. 

And technically you're right; he doesn't lose (all of) his coverage but he doesn't maintain his existing level of coverage. Right now Medi-CAL pays for all of his premiums and there are no co-pays other than certain drugs. And for a 78 year old man with diabetes and vision problems (and total assets of only $2000!) it's a very valuable program.

 I know HI is in the US!!! I just read that he could lose his insurance and that didn't make sense to me. That was why I asked. And that reminded me about leaving the country next year - a senior moment that just cropped up in the post. Must be an ongoing thing trying to keep all the benefits within guidelines.  

Guess he will just have to decide which is more important then - trip to HI or paying co-pays.  

[TheOtherMe]

I hope for his sake he decides the medical coverage is more important than the trip to HI, although I can see the temptation.  It can be very hard to re-qualify for benefits once lost.

Dad has just inherited mom's IRA.  Since they were the same age (90), the bank just combined the two IRAs in to one.  Mom never earned as much as dad, so her RMDs were much smaller.  She had just taken hers before she died in May and it was less than $900.  It was not down to zero at age 90.

I have no idea of how the RMDs are determined.  The bank said both mom and dad had taken their RMDs for this year.  

There is a line on the 1040 for the rollover.  There should be an AARP/VITA type program where the return can be prepared at no charge.  As sharp as you are, Bonny, I'm guessing you could prepare it.  Sounds like all that would go on the return is Social Security and the rollover and any RMD taken this year.

[Ombud]

Single seniors need to file a return if their income is over 11,500, threshold for HOH is 14,350


Pub 17 Table 1.1 pg 6

[Bonny]

Jun 19, 2014 5:10:06 GMT -5 Ombud said:

Single seniors need to file a return if their income is over 11,500, threshold for HOH is 14,350


Pub 17 Table 1.1 pg 6

Ombud,

I saw that on the 1040 but all of his income is SS and at age 78 not taxable. He has no other income than SS probably for the last 6 years.

[Bonny]

Jun 18, 2014 22:04:38 GMT -5 TheOtherMe said:

I have no idea of how the RMDs are determined.  The bank said both mom and dad had taken their RMDs for this year.  

I just typed in RMD in the Irs.gov search engine and got a little chart and printed it out. Once they start taking the RMDs you take the balance of the account as of 12/31 of the prior year and divided it by the chart's estimated life expectancy. In Dad's case it's 19.5 years or on an estimated $16k balance about $800 for 2014.

For your father at age 91 it looks like you divide by 10.8.

The chart goes all the way up to 115 where they estimate another 1.9 years!

There is a line on the 1040 for the rollover. There should be an AARP/VITA type program where the return can be prepared at no charge. As sharp as you are, Bonny, I'm guessing you could prepare it. Sounds like all that would go on the return is Social Security and the rollover and any RMD taken this year.

Thanks for the kind compliment @theotherme. I don't know how "sharp" am as much as cheap and lazy.

I'm thinking me filling out three lines on the 1040 is easier for me to just fill out and have Dad sign than walking him through the process with another person.

[TheOtherMe]

Jun 19, 2014 9:01:41 GMT -5 Bonny said:

Jun 18, 2014 22:04:38 GMT -5 TheOtherMe said:

I have no idea of how the RMDs are determined.  The bank said both mom and dad had taken their RMDs for this year.  

I just typed in RMD in the Irs.gov search engine and got a little chart and printed it out. Once they start taking the RMDs you take the balance of the account as of 12/31 of the prior year and divided it by the chart's estimated life expectancy. In Dad's case it's 19.5 years or on an estimated $16k balance about $800 for 2014.

For your father at age 91 it looks like you divide by 10.8.

The chart goes all the way up to 115 where they estimate another 1.9 years!

There is a line on the 1040 for the rollover. There should be an AARP/VITA type program where the return can be prepared at no charge. As sharp as you are, Bonny, I'm guessing you could prepare it. Sounds like all that would go on the return is Social Security and the rollover and any RMD taken this year.

Thanks for the kind compliment @theotherme. I don't know how "sharp" am as much as cheap and lazy.

I'm thinking me filling out three lines on the 1040 is easier for me to just fill out and have Dad sign than walking him through the process with another person.

I was basing my assessment of "sharp" on your many posts on rentals and other financial things I have read.  Have not always commented because I had nothing to add to conversation.

I do know what you mean about it being easier for you to just prepare it and have your dad sign it.  

Parents have just let the bank figure out the RMD.  Dad situation this year is that he will file married jointly with mom as deceased.  Next year, he will be single and he will make us figure out if he has to file a tax return.