Tax deductions for medical expenses
My mother recently entered an assisted living facility. She has long-term care insurance, but it is not going to cover all the costs. I have to start liquidating some of her investments. I know at a certain point you can take deductions for medical expenses. in regard to those deductions, does it matter which investments I liquidate? She is 93 and has money in an IRA, a variable annuity, a fixed-index annuity, and bond and equity mutual funds in a brokerage account. Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2022-08-18 13:34
The source of the funds does not directly affect the deductions, but the higher the taxable income caused by IRA and annuity distributions, the more taxes are owed and the medical deduction is reduced by 7.5% of the added taxable income. Note that she must take an IRA RMD anyway, but it is probably not enough to pay her expenses. If additional funds are needed, selling investments from the brokerage account will produce less taxable income and any cap gains will be taxed at a lower rate than her other income. Note that her deductions may not cover the rent portion of assisted living, but it will cover additional medical related costs incurred at the facility. In some cases it will also cover rent, depending on her need to be there.
Permalink Submitted by Michael Suman on Fri, 2022-08-19 21:03
That is very helpful. Thanks, Alan!
Permalink Submitted by David Mertz on Thu, 2022-08-18 15:53
Also consider that, assuming no relevant changes to the tax code, the mutual funds get a step-up in basis upon her death but the IRA and annuities do not get a step-up in basis. If upon her death assets will be expected to remain and pass to beneficiaries, it might be useful to consider the amount your mother would be expected to pay in taxes before death as well as the amount the beneficiaries would be expected to pay in taxes on remainder after her death.
Permalink Submitted by Michael Suman on Sun, 2022-08-21 21:24
That is certainly an important consideration. Thanks, DMx.