As I was doing my mother in law’s taxes, over three years ago, I wrote, Mom – You don’t itemize, describing her tax return a bit and the fact that her medical deductions weren’t enough to flow to her itemized deductions, and so she remained a Standard Deduction filer. Since her taxable income put her below the threshold to hit the 25% bracket, I took advantage of the Roth IRA conversion to “top off” that 15% bracket.
It was all going well. Then her situation deteriorated to the point that independent living no longer worked for her. At more than $70,000 per year, the cost qualifies as a medical deduction. It’s a memory care facility, and passes the IRS test for what help the resident needs. The result is that from not coming close to itemizing, mom will now blow through the medical deduction exclusion (7.5% of AGI) as well as the standard deduction.
It’s all about the endgame. To handle our finances in the most tax efficient way possible require a knowledge of not just today’s tax code, and a guess as to tomorrow’s, but also an estimate of how long we’ll be on earth. Recently, a friend was asked what he did for a living before he retired. He responded that he worked as an actuary for an insurance company. The follow on question was simple, “So you could tell me when I’ll die?” I jumped in, and answered, “No, but if there were 1000 of you, he’d tell you, with scary accuracy, how many will be alive after 10 years.” Yes, I’m great at cocktail parties. But that’s the punchline. Man plans, God laughs.