This article is condensed from one by Brian Vnak published on Sept. 27, 2016 at www.Marketwatch.com.
I love how people come up with these strategies. Granted, it only fits a narrow swath of society, but for those it fits, it is awesome.
Our parents are aging and living longer than ever. Many of their children are helping with their parent’s finances in a caretaker role. Busy schedules often mean opportunities for tax deductions go unnoticed and are unused.
Like anyone else, people 65 and over can deduct medical expenses that exceed 10% of their adjusted gross income (AGI) if they itemize. Medical expenses typically increase as we age but we often also see income drop or level off. When this happens, you could see medical deductions that go unclaimed as the amounts claimed exceed taxable income. Let me explain.
Let’s say that John’s mother has an income of $40,000. $22000 of this is non-social security taxable income from an IRA and interest. She normally takes the standard deduction because her house is paid off and she can’t itemize. In 2015 with that income and the standard deduction of $7850 (this is higher for elderly people) and her $4000 exemption, she would have taxable income of $10150.
But let’s say that John’s mother had $30,000 of medical expenses. Her AGI was $22,000 so she can deduct all but $2200 of those bills on a Schedule A. She paid taxes on her home and gave some items to charities so let’s say her total deduction was $30,000. But she only had taxable income of $10150. Subtracting the $30,000 from that leaves a negative $19,850, which is the part of the deduction that is wasted. She doesn’t have enough taxable income to deduct the entire amount.
But she has an IRA. What if she converts some of a traditional IRA to a Roth IRA. If she converted $30,000, she would be able to use up all of the available deduction without paying any more taxes than she would have using the standard deduction. (In practice, a bit more of her social security would be taxable but that would be minimal.) And the Roth IRA is still under her control, available if she needs it but she will never have to pay taxes on the any withdrawals from the Roth in the future. Even on the earnings. And, upon her death, her beneficiaries are likely not to have to pay taxes on distributions from a Roth account either (though they would on distributions from traditional IRA’s).
At AFS, we are always looking for ideas like this that we can utilize for our clients.
Use the BEST for LESS. Call us for your tax needs at 303-745-3962.