Get smart with your money
By Liz Weston
Dear Liz: I take $5,000 per month out of my brokerage account (and the $1,400 in taxes when I withdraw the money) for my husband’s Alzheimer care facility where he now lives 24/7. Can I only claim that on my taxes under medical expenses if I itemize my deductions on my taxes? I don’t have any other deductions.
Answer: Your husband’s expenses may be enough to justify itemizing even if you don’t have other deductions.
The standard deduction for married couples in 2024 is $29,200. To itemize, your deductions would need to be higher than that amount. Furthermore, medical expenses must exceed 7.5% of your adjusted gross income to be deductible, notes Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
If your husband meets certain criteria, however, the deduction can include the expenses related to meals and lodging at the facility as well as the medical care portion, Luscombe says.
A licensed healthcare professional must certify annually that your husband is chronically ill and living in the care facility due to medical necessity, he says. A tax pro or the facility itself can provide further details.
By Liz Weston
Dear Liz: I just read your column on HSA accounts. I was with you right up until “deathbed drawdown.” I sincerely hope that I am not thinking about my HSA when I am nearing death. I’d just rather pay the tax.
Answer: That’s certainly your prerogative, but financial planners note that good record keeping can allow those with large HSA balances to avoid an otherwise unnecessary tax bill.
HSAs offer a rare triple tax break: contributions are tax-deductible, the money grows tax deferred and withdrawals are tax free when used for qualifying medical expenses. Furthermore, HSAs can be rolled over from year to year and invested for growth, which has led some people to accumulate substantial sums as a supplement to their retirement funds.
Fortunately, you don’t have to take a withdrawal in the same year you incur an unreimbursed medical expense. As long as the expense was incurred after you established the HSA and before your death, it can justify a tax-free withdrawal years or even decades later. Those who have kept good records of their unreimbursed medical expenses can justify last-minute withdrawals if necessary.
By Liz Weston
Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?
Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.
As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.
The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.
By Liz Weston
Dear Liz: My retirement account covers all my expenses, including medical. I also have $60,000 in a health savings account that is invested in a mutual fund. I’m struggling with how to use that. I could use it for all current medical costs, or just for unexpected big ones. Or I could keep the HSA as backup in hopes of leaving it to my heirs. All options seem to have advantages, and I’m stuck. Your thoughts?
Answer: HSAs offer a rare triple tax benefit: Contributions are deductible, the money grows tax deferred and withdrawals can be tax free if there are qualifying medical expenses.
If anyone other than your spouse inherits the HSA, however, it basically stops being an HSA. The account becomes taxable to the beneficiary in the year you die, which means the HSA loses one of its three tax breaks.
Inheriting an account that’s taxable is probably better than no inheritance at all. But generally it’s better to use the HSA yourself or leave it to a spouse and designate other money for heirs.
Trying to figure out the optimum rate of spending this money is obviously tricky. The longer you leave it alone, the more it can grow. But the longer you live without spending it, the greater the risk you’ll die without taking advantage of those tax-free withdrawals.
If you’re reluctant to tap the HSA, give yourself the option of “deathbed drawdown.” By keeping good records, you may be able to empty the account at the last minute and avoid taxes.
As you may know, you don’t have to incur a qualified medical expense in the same year you take an HSA withdrawal for the distribution to be tax free. As long as the expense is incurred after the HSA is established and before you die, it can justify a tax-free withdrawal, as long as the expense wasn’t reimbursed — paid by insurance or used for a previous HSA withdrawal. So keep careful records of all the medical expenses that you pay out of pocket. If you get a bad diagnosis or your health starts to deteriorate, you can use those receipts to justify a tax-free withdrawal.
By Liz Weston
Dear Liz: Do you have any general advice for choosing a tax preparer? My financial advisor has recommended switching my 403(b) contributions over to Roth 403(b) with the same investment plan. I am worried that this could put us at risk for a higher tax bracket currently.
Answer: Ideally, a financial advisor wouldn’t recommend switching to a Roth option without knowing a fair amount about your current and future tax situations. Otherwise, the advisor wouldn’t be qualified to determine whether giving up the current tax break is likely to pay off later.
Unfortunately, not all financial advisors are truly qualified to give the advice they do. Some, particularly those advising people about 403(b) investments, are insurance salespeople rather than fiduciary financial planners.
You can get referrals to tax pros from the National Assn. of Enrolled Agents and your state’s chapter of certified public accountants. (The American Institute of CPAs has compiled a list of those at its website.) Both enrolled agents and CPAs are fiduciaries who promise to put your best interests first.
For broader financial advice, consider getting referrals from one of the organizations representing fee-only fiduciary planners such as the Garrett Planning Network, the XY Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners.
Also, teachers should consider spending some time on the nonprofit 403bwise website, which grades school districts’ retirement plans and seeks to educate teachers about the costs of trusting the wrong people.
By Liz Weston
Dear Liz: My father-in-law, age 100, has more than $1 million in stocks and bonds purchased in the 1980s and 1990s. With the stock market so high, I have suggested that he might want to sell the investments, take the tax hit and consolidate into short-term certificates of deposit or similar. This would make it easier for his family to manage (in trust) upon his death. Does this make sense or do we leave it alone?
Answer: Selling now means your father-in-law would have to pay a substantial and perhaps unnecessary tax bill on the gains he’s incurred over the years. If he instead leaves those assets to his heirs at his death, most likely no tax would be owed on the gains.
There are some exceptions, such as if the investments are held in retirement accounts or an irrevocable trust. But investments held in revocable trusts, such as living trusts, should qualify for the favorable step-up in basis that would eliminate the taxable capital gain at his death.
Yes, there’s always a risk that the markets could drop — but they would have to drop pretty far to wipe out all his gains, assuming he’s got a reasonably diversified portfolio. A fee-only, fiduciary financial planner could review the portfolio and offer recommendations about any changes that might be needed, while a tax pro could discuss potential strategies for minimizing the tax bill.