For those taxpayers 70½ and older and retired, the IRS requires annual withdrawals from retirement accounts. Some fortunate taxpayers don’t need to use their entire required withdrawal amount for living expenses and wonder whether there are tax advantaged ways to put this “extra” money to use. Here are three tax advantaged ways some taxpayers can use RMD amounts.
Use RMDs to Pay Estimated Income Taxes
The IRS and most states consider income taxes due when income is received. For taxpayers who are employed, taxes are usually withheld from each paycheck and sent to the IRS. Other income, such as interest, dividends, capital gains, pensions and social security may be taxable and income tax withholding is not required. Taxes are still due, so, instead, taxpayers are required to make quarterly estimated tax payments.
Quarterly estimated tax payments are due in April, June, September and by January 15 (for the prior calendar year). Payment is considered made when payment is sent to the IRS. Making estimated payments on time can present challenges because of the extra calculations, paperwork, cash flow or just simply remembering to make payments on time. Late payments of estimated taxes may result in tax penalties.
For taxpayers who don’t need all of their RMD amount for living expenses, using some of the RMD to pay estimated taxes has a tax advantage. When RMD money is used to pay estimated taxes, the IRS has a special rule favorable to taxpayers. Instead of considering the payment made when the money is sent to the IRS, the payment may be made at the end of the year but is treated by the IRS as being paid evenly during the year at the required times. Why does the IRS allow this favorable tax treatment? Perhaps to encourage investors whose cash flow and spending doesn’t always perfectly match the quarterly payment dates.
Use RMDs for Gifts to Charities
RMDs are taxable income and the amount can shift a taxpayer into a higher tax bracket. For taxpayers subject to RMDs, the IRS permits any part of the RMD to be satisfied without increasing taxable income if the amount is sent directly from the IRA to an IRS recognized charity. The RMD cannot exceed $100,000 for this purpose and must come from an IRA not a 401(k) or other retirement account.
Use RMDs to Pay Long Term Care Costs
Paying for long term care costs creates enormous challenges. For families able to pay for care at home or in assisted living residences, one of the challenges is deciding which accounts to use first. Using RMDs can provide important tax advantages that make family money last longer. Long term care costs are income tax deductible for taxpayers who itemize, if the costs:
- cover care for a person who is chronically ill, meaning the person cannot perform at least two activities of daily life without help (i.e., eating, bathing, dressing, toileting, continence, and transferring from bed or chair to daily activities);
- are medically necessary for services from a diagnosis, rehabilitation, therapy, cure, treatment, maintenance or personal care, often evidenced by a treatment plan prescribed by a physician;
- include residence and meals at an assisted living facility if part of a medically necessary treatment plan;
- are more than 10% of the taxpayer’s adjusted gross income (Congress is considering reducing the current 10% threshold to 7.5% as it has been in the past); or,
- are for long term care insurance premium but with age based limits (for 2019, over age 71 is $5,270; 61-70 is $4,200 and 51-60 is $1,580 per year), with self-employed taxpayers being able to deduct more, without itemizing.
As always, consult trusted tax and financial professionals before making important tax and financial decisions.
Samuel Financial LLC is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781) 461-6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. www.samuelfinancial.com.
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