Answers to Individual Investors’ Tax Questions

During last week’s webinar on taxes, several AAII members asked for clarification on this year’s tax law changes as well as about the tax code in general. So today, I’m going to change up the usual format and give answers to questions likely to be of interest to many of you.

Am I able to still take a QCD for 2020?

Yes, you can take a qualified charitable distribution (QCD) for 2020 up to the $100,000 limit if you are at least 70½ years old. Because required minimum distributions (RMDs) are suspended this year, there will be no distributions for the QCD to offset. Making a QCD this year will reduce the value of your IRA by the amount of the distribution, thereby reducing the account balance that future RMDs will be based on.

Is dividend income offset by capital losses?

Capital losses offset capital gains. Up to $3,000 of losses can be deducted in a single year with any excess carried over to future years. To the extent that you have a deductible capital loss, it will reduce the amount of total taxes owed (which can include taxes on dividend income).

Is the stimulus check taxable?

No. The stimulus payments made earlier this year are a rebate. They don’t appear on Form 1040 until after total taxes are calculated. Because they are technically a rebate on 2020 taxes, they should not impact state taxes either. (Check with your state to be sure if you have questions.)

The recovery rebate credit is based on your 2020 adjusted gross income (AGI). The checks were issued based on your AGI in 2019 or 2018, depending on the timing of when you filed your 2019 returns. If your AGI is lower this year, you may be eligible to claim additional dollars. If your AGI rose, you won’t have to pay anything back. The income phaseouts start at $150,000 for married filing joint and $75,000 for single filers. Those with 2020 AGI of $198,000 or $99,000, respectively, would not qualify for the rebate.

As of this morning, Bloomberg said the U.S. Senate is discussing the inclusion of a second round of stimulus payments in the latest coronavirus aid package. The fate of the legislative package—let alone what precisely it will encompass—is currently unknown as of this afternoon.

What is the floor for deducting medical expenses in 2020?

The SECURE Act lowered the floor for deducting medical expenses to those exceeding 7.5% of AGI in 2019 and 2020. It will go back to 10% in 2021 without new legislation. If you are close to meeting this limit and can realize medical expenses this year instead of next, it may make sense to do so. A wide range of expenses qualify for the deduction; see IRS Publication 502 for the full list.

Can I make both a 401(k) contribution and a traditional or Roth IRA contribution?

It depends on your income. Married, joint filers with modified AGI of $104,000 or less ($65,000 or less if single) can deduct the full amount of the traditional contribution. The limit is $196,000 for a person filing a married joint return who is not covered by a workplace retirement plan but whose spouse is.

Regardless of whether you are covered by a 401(k) or not, you can make the full Roth IRA contributions if your modified AGI is $196,000 or less if filing a joint return or $124,000 or less if filing as single.

What are the tax implications if I take my RMD as an in-kind distribution, meaning taking shares instead of cash?

An in-kind distribution involves the transfer of shares a stock, mutual fund or exchange-traded fund (ETF) instead of selling those shares to raise cash to fund the transfer. An RMD fulfilled via an in-kind distribution would reset the cost basis of those shares.

Say you bought 200 shares of a stock at $25 per share in your traditional IRA and the stock now trades at $50 per share. When you do the in-kind distribution, the value of the RMD withdrawal will be $10,000 (200 × $50). You will be taxed on this $10,000 distribution. Your basis in the taxable account, where the stock is transferred to, will reset to the $50 share price (instead of the original $25 purchase price). So your future capital gains (or losses) will be based on the $50 per share value.

If I move non-deductible dollars from a traditional IRA to a Roth IRA, will I pay taxes on the conversion?

No, because the IRA contribution was made with non-deductible dollars. Moving non-qualified contributions (contributions that did qualify for the tax deduction) from a traditional IRA to a Roth IRA is referred to as a backdoor Roth IRA conversion.

When making a non-deductible IRA contribution, it is best to avoid commingling non-deductible dollars with qualified (deductible) contributions by opening a separate IRA for them. Doing so will avoid future tax headaches. If you are planning on doing a backdoor Roth conversion, financial advisers suggest investing the non-deductible contributions made to a traditional IRA for a period of time (e.g., several months) before doing the conversion.

What are the tax rules for gains and losses on cryptocurrency?

Cryptocurrencies such as bitcoin are subject to capital gains taxes just like other assets are. Though the currency is virtual, the taxes on any gains are real. The IRS has a helpful cryptocurrency FAQ.

Should I expect my taxes to increase next year?

Even if the Democrats win both runoff races in Georgia (FiveThirtyEight.com currently shows the two races to be toss-ups), they would only control 50 seats in the Senate. Vice president-elect Kamala Harris would serve as a tiebreaker on any party line votes. This fact is going to make it difficult for the Biden administration to pass through any major legislation without some form of compromise. It’s worth remembering that the Tax Cuts and Jobs Act passed with only 51 votes.