Tax Rules for Roth Conversions

Comment on “The Individual Investor’s Guide to Personal Tax Planning 2022,” by AAII Staff, in the December 2022 AAII Journal:

My understanding is that the amount of a Roth conversion is not subject to the additional 3.8% net investment income (NII) surtax on capital gains and dividends for married couples filing joint returns with NII and modified adjusted gross income (MAGI) above $250,000 but that the amount of the conversion is included in MAGI and therefore could put a taxpayer over the threshold so they would have to pay the NII surtax.
—Peter N. from Tennessee

Health Savings Account Taxes

Comments on “Year-End Tax Moves to Consider for 2022,” by Charles Rotblut, CFA, in the December 2022 AAII Journal:

Can you still take a $7,500 medical expense deduction if you are contributing to a health savings account (HSA)?
—Joseph L. from Pennsylvania

AAII editors respond:
Joseph, Internal Revenue Service (IRS) Publication 502, Medical and Dental Expenses, includes these instructions in the section on What Expenses Aren’t Includible: “You can’t include in medical expenses amounts you contribute to a health savings account. You can’t include expenses you pay for with a tax-free distribution from your health savings account. You also can’t use other funds equal to the amount of the distribution and include the expenses.” For more information, see also IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Both of these IRS publications are available to read or download at IRS.gov.

Am I eligible to contribute to my health savings account in 2023 if I have a high-deductible health plan but go onto Medicare during the year (September 1)?
—Franklin M. from Georgia

AAII editors respond:
Franklin, according to the IRS, your HSA contribution limit is zero starting with the first month you are enrolled in Medicare. Please see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for full details on how to calculate your HSA contribution limit when you are not eligible for the entire year.

“Strategically realizing gains can help investors who have lower incomes. Married couples filing joint returns and single filers with income below $83,350 and $41,675, respectively, will pay a 0% tax on long-term capital gains for 2022.” Actually, a single person who takes the standard deduction could realize $54,625 in long-term capital gains and qualified dividends and pay zero income tax (assuming they have no other income). A married couple in the same situation could realize $109,250 and pay no taxes.
—Robert A. from North Carolina

Take Advantage of High-Yield CDs

Comment on “Savings Account Yields Are the Highest Since 2008,” in Dispatches in the December 2022 AAII Journal:

Fidelity offers investors brokered certificates of deposit (CDs), which are CDs issued by banks for the customers of brokerage firms. The CDs are usually issued in large denominations and the brokerage firm divides them into smaller denominations for resale to its customers. Because the deposits are obligations of the issuing bank, and not the brokerage firm, Federal Deposit Insurance Corp. (FDIC) insurance applies. On December 3, 2022, the following new issue rates were available: 4.2% for three-month CDs, 4.6% for six-month CDs and 4.75% for 12-month CDs. There are other CDs with different maturities available.
—Cesare T. from Florida