When I turn 72, I'll have to take required minimum distributions (RMDs) from my IRA. I'm wondering how this mandatory additional annual income will affect my federal and state tax returns, my Medicare premiums, and my enhanced School Tax Relief (STAR) property tax exemption. Is there a way to minimize its impact?
Your RMDs will increase your federal taxable income. But you get a break on state taxes, thanks to New York's Pension and Annuity Income Exclusion. There's no state tax on your first $20,000 of yearly income from tax-deferred retirement accounts like IRAs and employer-sponsored retirement plans.
That tax exclusion is available to all state residents over age 59½. It's also available to retirement account beneficiaries, regardless of their age, on distributions they take from inherited accounts, provided the deceased owner was at least 59½. (If the deceased account owner had several beneficiaries, they must share his annual $20,000 exclusion.)
As I explained last week, your annual eligibility for a STAR property tax exemption is based in part on the income information you reported on your federal tax return two years earlier. But taking your RMDs won't affect your STAR eligibility. The reason: For STAR purposes, "income" is defined as federal adjusted gross income minus the taxable amount of your total distributions from IRAs.
Your annual Medicare Part B and Part D premiums are also based on the income reported on your federal tax return two years earlier, so depending on how much your RMDs increase your income, they can also significantly boost your Medicare cost. Next week, I'll discuss a strategy that may help you avoid a Medicare premium increase when you start taking RMDs.
The bottom line
Taking annual RMDs won't affect your federal and state tax bills exactly the same way.
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