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Taxes / Reducing expense ratios and avoiding the dreaded IRMAA
« Last post by Nords on May 04, 2017, 09:01:56 PM »
It's been real quiet around here.  Now that everyone's recovered from tax season, let me start a new question.

As some of you know, I'm my father's conservator.  He first noticed his Alzheimer's symptoms in 2008, he's been in a care facility since early 2011, and this year he's entering late-stage.  The next five years are totally unpredictable. 

I've been handling his finances since 2011, under the benevolent supervision of the Denver probate court.  I've conservatively projected his investments out to 2025, well past most of the Alzheimer's survival bell curve, so I doubt that Medicaid will rear its ugly head.  Let's not turn this thread into a Medicaid tactics discussion.

I'm getting ready to mess with Dad's taxes, and I thought I'd talk through it here to make sure I understand it.  Feel free to poke holes in my plan.

Back in 2011 (when I started my fiduciary forensic financial analysis on his files) I learned that for at least 20 years he'd been living on less than half of his income from investment dividends/interest, a small pension, and Social Security.  His AGI was about $65K and he'd generally spend about $25K.  He was Mustachian before it was cool.

During that time he'd invested heavily in Fidelity mutual funds and by 2011 his asset allocation was over 85% equities.  Back then we were all still scared to death of the stock market's recovery and legislation was expiring for the low tax rates on capital gains.  In 2012 it seemed prudent to rebalance to 25% equities, 25% bond funds, and 50% CDs. 

Since then the capital-gains tax rates have been extended, Dad's long-term care insurance payout has finished, and he's slowly drawing down his assets.  His asset allocation has drifted up to 35/15/50 over the last five years, and I could let that continue to drift.

However his investment expenses are higher than they could be.  He's held some of his Fidelity shares since the early 1990s.  They're in actively-managed funds with expense ratios: 
0.86% Value Discovery
0.82% Blue Chip Growth
0.75% Capital & Income Fund
0.68% Contrafund

Meanwhile the Fidelity S&P500 index fund has an expense ratio of about 0.09%. 

Dad's current fund expenses aren't exactly highway robbery... well... among today's choices maybe they are.  Expenses could be reduced.

When Dad was receiving the payout from his long-term care insurance policy, that was considered untaxed reimbursement on his medical expenses.  He was paying the usual federal and Colorado taxes on his usual taxable income.  But now that Dad's long-term care insurance policy has completed its payout, his medical deductions are about $100K/year.  He paid zero taxes in 2016 and might never have a tax bill again.

Dad used to be in the 25% income-tax bracket, but now his medical deductions put him in the 0% bracket.  More significantly, those medical deductions mean that he could take a lot of capital gains at the 0% rate.  When I play around with MoneyChimp's calculator (, he could realize up to $37K of long-term capital gains at the 0% capital-gains tax rate and take an additional $34K in deductions & exemptions. 

But not so fast.

In 2012 when I drastically rebalanced Dad's portfolio, my blissful ignorance ran head-first into the Medicare "Income-Related Monthly Adjustment Amounts" rules.  IRMAA premium hikes cost an extra $2000 on that rebalancing, and I haven't sold any shares since then.
I'm going to avoid IRMAA issues this time around by keeping Dad's modified adjusted gross income just below $85,000. 

His mutual funds have a low cost basis, but I could use those AGI constraints to gradually replace the Value Discovery and Blue Chip Growth funds with a simple S&P500 index fund.  That would save about $150/year on expenses for each year that I took about $20K in cap gains.

If the markets continue to go up, Dad wins.  If the markets stall out, Dad wins.  If the markets go down, Dad has an opportunity for tax-loss harvesting of the S&P500 fund while ditching even more of the other funds with their high expense ratios.  I'd call that a win too. 

I'm still going to model this in Turbotax and make sure that I haven't overlooked something.  Has anyone else dealt with this sort of financial management?  Anything else I might be missing?
General Discussion / Financial Planner Reference?
« Last post by markporter on April 26, 2017, 03:56:41 PM »
Curious if anyone on here can recommend an independent, fee-based, financial planner they've worked with and respect?  Preferably in the Madison/Dane County area but any recommendation would be appreciated.
Real Estate / Re: Forming an LLC to Manage Real Estate
« Last post by Tim on April 25, 2017, 08:22:59 AM »
Thanks Keith, but that is not quite what I meant. I'm trying to separate ownership from management. Specifically, is it allowable for my spouse to form a separate property management company that we in our personas as owners of real estate could then hire to manage our properties? The properties would not be put into the same corporate structure as the management company. My understanding is that an owner cannot be paid for his or her labor, but does a separate management company that happens to be owned and run by one of the property owners face the same restriction?

By the way, loved the post It helped clear up some confusion I had over the repair safe harbor rules.
Real Estate / Re: Forming an LLC to Manage Real Estate
« Last post by KeithTax on April 24, 2017, 07:59:39 PM »
Real estate is passive income no matter what you do (with the exception of organizing as a corporation and taking a wage). You can own your rentals in an LLC but it will not allow additional retirement contributions. Sorry.
Taxes / Re: Claim 100% of Mortgage interest for co-owned duplex?
« Last post by jgordon1 on April 23, 2017, 09:45:07 AM »
Well maybe this year you can pay the bill and your brother could "lend" you some money
FIRE / Re: What is my FIRE number
« Last post by jgordon1 on April 23, 2017, 09:43:05 AM »
Hi Gordon,
It sounds like you just need 2-3 years of living expenses for ages 60-62, minus the 10,000 in side gig money.  After that the pensions will kick in and cover all but $300 a year, assuming they are inflation adjusted.  Then as your side gig winds down, you'll be able to file for SS to replace it.  Here's how I would break it down in non-inflation adjusted numbers:

Age        Expenses   Income   Shortfall
60-61     35,000          10,000    25,000
62-67     35,000          34,700    300
67+        35,000          40,300    -5300 (this is an overage)

So for the first 2 years you just need $25k a year.  At a 4% withdrawal you would need $625,000, but that would allow you to withdraw that extra $25k every year in retirement.  Do you want to increase your lifestyle that much at at 62, or would you be ok with spending the principle to fund the first 2 years of retirement and starting with a lower retirement account balance? The other option would be to leave it as an inheritance, or some combination of the above.

Thanks..I basically came up w the same #'s but I don't think I will need 625,000 as I only need to cover those few years...Unless something crastic happens I should be able to downsize at some point and use that money for retirement
FIRE / Re: What is my FIRE number
« Last post by jgordon1 on April 23, 2017, 09:40:58 AM »
And depending on whether or not you buy medicare gap insurance (for what Medicare does not cover) at 65, your expenses definitely will go down at 65 when Medicare kicks in. There is a cost table online, but in your situation let's say Medicare is $200 per month, or $2400 per year. Expenses then go down by (8000 - 2400 =) $5600.

Thanks..I didn't think of gap insurance...
Taxes / Re: Startup expenses
« Last post by Tim on April 22, 2017, 08:13:32 AM »
No, the business does not yet have to exist. The key date is when you open for business. If a rental business, the first day you offer the property for rent. If you are offering services or merchandise, the first day you accept orders, etc. All expenses directly related to getting the business up and running before that date are start up expenses. Be careful though. You can only claim expenses that actually went towards the business (e.g., thinking you might sell Amway you travel to an Amway convention, but end up opening a eBay reseller business instead. The Amway travel would not be deductible as a startup expense). I'm not an accountant, so you will need to check before you file taxes, but as I recall only the first $5000 in expenses can be deducted in the first year. Any more than that must be treated as a capital expense and deducted in equal amounts over the next 15 years.
FIRE / Re: What is my FIRE number
« Last post by Tim on April 22, 2017, 07:38:07 AM »
And depending on whether or not you buy medicare gap insurance (for what Medicare does not cover) at 65, your expenses definitely will go down at 65 when Medicare kicks in. There is a cost table online, but in your situation let's say Medicare is $200 per month, or $2400 per year. Expenses then go down by (8000 - 2400 =) $5600.
Real Estate / Forming an LLC to Manage Real Estate
« Last post by Tim on April 21, 2017, 01:24:55 PM »
My wife and I own two rental properties. We have a positive cash flow so I would like to shelter that revenue. Since my wife actually manages the properties, can she form a sole proprietorship or LLC that we pay to manage the properties?

If so, I would then have all that revenue go to a SEP IRA that I would set up for the company. If not, any other suggestions on sheltering the positive cash flow that don't involve me spending money to incur additional expenses?
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