Tax Guide Update

As we went to press, Congress passed spending bills. Though legislation had yet to be signed into law, news reports suggested President Trump was expected to do so. In addition to keeping the government running, the bills contained amendments potentially affecting some of you.

Medical Expense Deduction

The threshold for deducting qualified medical expenses was lowered to 7.5% of adjusted gross income. Previously, the threshold was 10.0%. The reduced threshold applies to both the 2019 and 2020 tax years. While it is now too late to recognize expenses for 2019, it may still be worthwhile to calculate all of your qualified medical expenses—including transportation to and from doctor’s appointments—to determine if you would be eligible to claim the deduction on your 2019 taxes. IRS Publication 502 lists which medical expenses qualify and which ones don’t.

RMD Age Raised

The SECURE Act, which previously had been stalled in the Senate, was attached to one of the spending bills. This legislation raises the age for when required minimum distributions (RMDs) must start from age 70½ to age 72. The change applies to “distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date.” The minimum age for taking qualified charitable distributions (QCDs) remains at 70½, however.

Inherited IRAs

The SECURE Act also establishes a 10-year deadline for when the assets held in an inherited IRA must be withdrawn. The provision effectively ends the practice of using stretch IRAs, in which a younger heir was able to spread out withdrawals from an inherited IRA over their lifetime. Spousal beneficiaries are exempt from the 10-year rule. Exceptions also exist for beneficiaries who are minors, disabled, chronically ill or not more than 10 years younger than the deceased owner of the retirement account. These new rules apply to retirement accounts where the owner has died after December 31, 2019. Those of you who could be affected by this change should speak with your estate attorney about the new rule, including those who have a trust listed as the IRA’s beneficiary.

Corrections and Clarifications

IRA Decision Tree Labeling Error

In the AAII InvestoGraphic “Roth Versus Traditional IRA” in the December 2019 issue, we unintentionally switched where “higher” and “lower” should be placed at the top of the graphic. It has been corrected, and you can download a PDF of the updated print page.

The rule of thumb is to opt for the lower tax rate. If you think your withdrawals will be taxed at a higher rate in the future, then you’d want to lock in the lower tax rate now by converting. Conversely, if you think your tax rate will be lower, you would want to keep the funds in a traditional IRA (or similar tax-deferred account).

Clearing Up Smart Tax Moves

Two clarifications for the article “Smart Tax Moves to Make Before Year’s End” in the December 2019 issue:

To have a Roth IRA conversion count for the 2019 tax year, the deadline for when the assets must leave the traditional IRA is December 31, 2019.

We’ve also reworded the paragraph concerning tax harvesting: Capital gains do not trigger the wash sale rule, only realized capital losses if substantially identical securities are repurchased within the 30 days.