Early to mid January is the time of year when I like to reflect on 2019 so I can then start planning for a productive and satisfying 2020. I find that if I give thought and thanks to the year just passed, I can dive into the new year with renewed energy and focus. Last week, Jen and I were doing just this as we reviewed our calendar of upcoming retirement planning classes and events this year. We really had a lot of fun last year connecting with hundreds of local folks and teaching them how to build a successful retirement system. We’re excited to continue these classes which will begin in a few weeks with renewed energy.
You know, it makes sense to us that we see a number of folks who attend our classes in January come because of a renewed commitment to their retirement system – a New Year’s resolution of sorts. We find that this is the perfect time for those preparing for or already in retirement to take a fresh look at their strategy and make sure that they not only get to retirement but then get through retirement successfully.
So with our time together this week, let’s refresh our knowledge to make sure we avoid some common financial mistakes in the new year by reviewing a few topics that Jen and I cover regularly in our classes.
While the 2017 tax-cut plan eliminated or restricted many itemized deductions from 2018 through 2025, it raised the standard-deduction thresholds. For 2019, the standard deduction will increase to $12,200 for individuals, $18,350 for head of household, and $24,400 if you are married. And don’t forget that if you’re age 65 years or older or are blind, you can deduct an additional $1,300 if you’re married and 1,650 if you’re single. So for many taxpayers, including retirees, it may not be worthwhile to itemize deductions, particularily for folks who have paid off their mortgages and can no longer include their mortgage interest in their itemized deductions.
However, if you have a benevolent nature there’s still a way you can benefit from a charitable contribution even if you don’t itemize. You see, if you’re age 70-1/2 or older you can donate up to $100,000 from your individual retirement account (IRA)- as a qualified charitable distribution (QCD) Generally speaking, as long as the IRA Custodian makes the distribution payable to an eligible charitable organization, it should not be counted as taxable income for the year. Of course, there are other requirements that must be met. Keep in mind, though, for QCDs, made in a tax year beginning after 2019, the QCD limit for that year is reduced (but not below zero) by the aggregate amount of deductions allowed for Traditional IRA contributions due to the newly passed Secure Act. In other words, deductible IRA contributions made for the year you reach age 70 1/2 and later years could reduce your annual QCD allowance. But still this may be a good approach to take the distribution without adding to your tax burden . . . and do some good with it.
Now a charitable contribution can also be made from a Roth IRA, but there might be no tax advantage for doing so, because such a distribution might already be tax-free if you meet certain requirmeents. In addition, there’s no urgency to take a distribution from a Roth IRA because Roth IRA owners not subject to required minimum distributions
Medical Expenses are another area you where you can enjoy a tax break. For the 2019 tax year, the threshold for medical expenses will revert to its prior level after it was lowered in 2017 and 2018 by the recent tax overhaul. For 2019, you can deduct unreimbursed medical-care expenses that exceed 10% of your adjusted gross income—your taxable income minus any adjustments to income such as deductions, contributions to traditional IRAs, contributions to health savings accounts, among other things.
For example, if you have an adjusted gross income of $60,000 in 2019, you’ll be able to deduct medical expenses exceeding $6,000. If you have qualifying medical expenses of $7,500, you’ll receive a medical-expense deduction of $1,500. The Internal Revenue Service allows deductions for dental and vision care, preventive treatment, prescription medications, surgeries and aids, such as glasses and hearing aids, as well as visits to psychologists and psychiatrists.
Another tax break to keep in mind is the portion of nursing-home care costs for you, your spouse or dependent that’s attributable to medical costs. Nursing home care can be expensive, and if you have an annual cost of, say, $100,000 and 35% or 40% of that is attributable to medical costs, the benefit can be significant.
Also, the entire cost of nursing-home care, including meals and lodging, may be deductible as a medical expense if the person is in the home primarily for medical care. Be sure to check out the IRS guidelines for deducting nursing-home expenses at www.IRS.gov for further details.
Another area where it pays to be vigilant is in calculating your taxable Social Security Benefits. Whether or not your Social Security benefits are taxable depends on your income level. Generally, the benefits will be taxed if your combined income—your adjusted gross income plus any tax-exempt interest plus half of your Social Security benefits—is more than $25,000 if filing single, or more than $32,000 if you’re filing joint.
Paying attention to these thresholds is important to help avoid a tax surprise next year by voluntarily having federal income taxes withheld from your Social Security benefits using IRS Form W-4V or from your pension using form W-4P. The IRS also offers a tax withholding estimator to help your determine how much you should have withheld.
Lastly, we are in the deep, deep stages of a secular bull market. Folks, this is important so stick with me here. If you have not done so already, this is the time to understand how recession-proof your investments truly are. Questions need to be answered such as, how did my current strategy behave in tough years, such as 2001, 2002, and 2008 . . . and most recently 2018? We must not let our judgement get clouded by good years, such as 2019. You see, historically, these are the times that I find uneducated investors assuming more and more risk, chasing gains without truly understanding the recession risk inherent in their portfolio.
Over our years together, you have read how to test your system and how to understand its behavior during good times, but especially tough times. If you are close to or in retirement, this is particulariy important since your investment plan must feed into your income plan. So, if you have not done so, make it your priority in 2020 to help recession-proof your investment system.
Folks, what is your recession risk? Shouldn’t you at least know? You betcha!
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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