Miscellaneous Developments
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Miscellaneous Developments Affecting Retirees
Tighter Restrictions on Medical Expense Deductions. – The tax law imposes overall
limitations on the deduction of medical expenses. In the past, a retiree could deduct aggregate
medical expenses for regular tax purposes only to the extent they exceeded 7.5% of adjusted
gross income, and could deduct such expenses for alternative minimum tax (AMT) purposes
only to the extent they exceeded 10% of adjusted gross income. After 2012, the deduction
threshold permanently increases to 10 percent. However, it remains at 7.5 percent for taxpayers
65 and older for tax years through 2016. The AMT threshhold remains at 10 percent for all
taxpayers.
(The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 9013.) See
Chapters 13 and 16 of the treatise for discussions of a retiree's medical expense deductions.
Relief from the New Tax on Net Investment Income. – To help fund Medicare and other
government healthcare subsidies, Congress has imposed a 3.8 percent tax on net investment
income for years after 2012. The investment tax applies to the lesser of (1) net investment
income or (2) the excess of modified adjusted gross income over a threshold amount. The
threshold amount is (a) $200,000 for an unmarried individual, (b) $250,000 on a joint return or
for a surviving spouse, and (c) $125,000 for a married person filing a separate return.
Net investment income includes interest, dividends, annuities, royalties, rents, and net gains
from disposition of nonbusiness property. However, net investment income does not include
distributions from tax-favored retirement plans, i.e., qualified retirement plans, IRAs, Roth IRAs,
eligible exempt organization plans, or eligible state/local government plans. (I.R.C. § 1411.) See
Chapter 17 of the treatise for a more complete explanation of the tax on net investment income.
Partial Annuitization of a Personally Purchased Annuity Contract. – If an annuity contract
permits, a retiree may divide the contract into two contracts and take an annuity from one of the
separated contracts but not from the other. The annuity must be for a term of more than 10
years, or for one or more lives. The investment in the original contract is allocated pro rata
between the separated contracts. Different annuity starting dates may apply to each of the
separated contracts. (Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2113.) See
Chapter 14 of the treatise for a more complete discussion of the taxation of personally
purchased annuties.
Personally Purchased Annuities Not Held by Natural Persons. – The Code generally taxes
annuity contracts not held by natural persons as if they were not annuity contracts. Exceptions
are provided for annuities held by tax-favored retirement plans and for "immediate annuities." An
immediate annuity is an annuity (a) purchased with a single premium, (b) providing for
substantially equal annuity payments, and (c) with an annuity starting date no later than one year
after purchase.
Also excepted are annuity contracts held by trusts or other entities as agents for natural persons
in a non-employment context. For example, a testamentary trust purchased and held separate
annuities on the lives of several individuals who were the ultimate residuary beneficiaries of the
trust. The IRS treated the annuities as held by natural persons since all the beneficial interests
were owned by individuals in a non-employment context. (I.R.C. § 72(u)(1); Ltr. Rul. 201124008.)
See Chapter 14.
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Tighter Restrictions on Medical Expense Deductions. – The tax law imposes overall
limitations on the deduction of medical expenses. In the past, a retiree could deduct aggregate
medical expenses for regular tax purposes only to the extent they exceeded 7.5% of adjusted
gross income, and could deduct such expenses for alternative minimum tax (AMT) purposes
only to the extent they exceeded 10% of adjusted gross income. After 2012, the deduction
threshold permanently increases to 10 percent. However, it remains at 7.5 percent for taxpayers
65 and older for tax years through 2016. The AMT threshhold remains at 10 percent for all
taxpayers.
(The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 9013.) See
Chapters 13 and 16 of the treatise for discussions of a retiree's medical expense deductions.
Relief from the New Tax on Net Investment Income. – To help fund Medicare and other
government healthcare subsidies, Congress has imposed a 3.8 percent tax on net investment
income for years after 2012. The investment tax applies to the lesser of (1) net investment
income or (2) the excess of modified adjusted gross income over a threshold amount. The
threshold amount is (a) $200,000 for an unmarried individual, (b) $250,000 on a joint return or
for a surviving spouse, and (c) $125,000 for a married person filing a separate return.
Net investment income includes interest, dividends, annuities, royalties, rents, and net gains
from disposition of nonbusiness property. However, net investment income does not include
distributions from tax-favored retirement plans, i.e., qualified retirement plans, IRAs, Roth IRAs,
eligible exempt organization plans, or eligible state/local government plans. (I.R.C. § 1411.) See
Chapter 17 of the treatise for a more complete explanation of the tax on net investment income.
Partial Annuitization of a Personally Purchased Annuity Contract. – If an annuity contract
permits, a retiree may divide the contract into two contracts and take an annuity from one of the
separated contracts but not from the other. The annuity must be for a term of more than 10
years, or for one or more lives. The investment in the original contract is allocated pro rata
between the separated contracts. Different annuity starting dates may apply to each of the
separated contracts. (Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2113.) See
Chapter 14 of the treatise for a more complete discussion of the taxation of personally
purchased annuties.
Personally Purchased Annuities Not Held by Natural Persons. – The Code generally taxes
annuity contracts not held by natural persons as if they were not annuity contracts. Exceptions
are provided for annuities held by tax-favored retirement plans and for "immediate annuities." An
immediate annuity is an annuity (a) purchased with a single premium, (b) providing for
substantially equal annuity payments, and (c) with an annuity starting date no later than one year
after purchase.
Also excepted are annuity contracts held by trusts or other entities as agents for natural persons
in a non-employment context. For example, a testamentary trust purchased and held separate
annuities on the lives of several individuals who were the ultimate residuary beneficiaries of the
trust. The IRS treated the annuities as held by natural persons since all the beneficial interests
were owned by individuals in a non-employment context. (I.R.C. § 72(u)(1); Ltr. Rul. 201124008.)
See Chapter 14.
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covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.