Smarter Bear Newsletter January 2025
For clients and friends of Smarter Bear
January is recordkeeping season, but think long-term
The flood of documents you received electronically and via traditional “snail mail” during January can be daunting. Still, you must keep your own copy of documents for all transactions that may be tax-related either now or in the future. With the advent of electronic delivery, many institutions have moved aggressively to get their members/clients/citizens to convert to electronic invoices and receipts. However, not all institutions are required to maintain those records as long as you might need them to, so be sure to download and preserve the documents important to you for tax purposes.
This is particularly true of documents relating to inherited property, such as the basis for valuation and items related to any property you have purchased and/or improved (and medical expenses, see below). These records may have long-term relevance, and the institution involved may have changed systems, lost records, or gone out of business when you realize that you need the records they provided.
IRS guidelines require that you retain records for 3 years that are relevant to a given filing, but your capital gains on a long-held property may not be applicable for a decade or two….
Health Savings Accounts (HSAs) are valuable, part 2
HSAs, which must be paired with high-deductible health care plans, have a triple tax advantage:
Contributions to your HSA account are tax-free; no income tax, no social security tax, and no Medicare tax,
The money in your HSA can be invested, and the income from those investments is tax-exempt. Your HSA grows tax-free, and
When you need money from your HSA to pay medical expenses, you pay no taxes on the funds you withdraw, provided they are used to pay for a Qualified Medical Expense (QME).
There are some limitations to be aware of: 1) You can only contribute to an HSA while you are enrolled in a high deductible health insurance plan, 2) if your employer doesn’t offer an HSA, there are available HSA providers who offer plans for individuals, however, you likely won’t be able to fund via payroll deductions, and thus you’ll be unable to avoid Social Security and Medicare taxes on those contributions, and finally, 3) If you withdraw funds for expenses other than QMEs you’ll pay taxes on those withdrawals, and if you are under age 65 when you make that unqualified withdrawal you’ll pay a hefty 20% penalty on top of your taxes.
Remember that you’ll have to maintain your records to show that your insurance did not pay for the QME and that it was not claimed as a medical expense deduction on your taxes.
Medicare IRMAA rates aren’t set in stone
People in or near retirement are likely familiar with Medicare premiums and IRMAA - Income-Related Monthly Adjustment Amount. IRMAA can substantially increase the Part B and Part D premiums. IMRAA is calculated based on the prior-prior year's income. So it’s possible to request a reduction using Form SSA-44 if your current year income falls due to specific "life-changing events," which include:
Death of a spouse
Marriage, Divorce or annulment
Work reduction or Work stoppage
Loss of income-producing property
Loss or reduction of certain kinds of pension income
Receipt of settlement payment from a current or former employer
Smarter Bear is always available for a free consultation to answer questions and discuss whether our services can help address your needs. You can reach us at smarterbear.net. We offer no-cost second opinions for DIYers or people working with another investment or financial advisor.
We write our own newsletter, so we know these topics well. Many advisors and firms employ marketing departments, generative AI, or third-party content services to produce their newsletters.
If you know others who would like to be added to our list, feel free to add them at https://smarterbear.substack.com. We aim to write short, helpful, and easy-to-read items on financial topics of interest. We'd like to hear any suggestions for topics to cover in future newsletters.
None of the above is intended as a substitute for investment, tax, or legal advice. Your personal situation will determine what's best for you, and we recommend you consult an appropriate professional advisor.