Are IRA conversions treated as part of the income used to calculate medical deductions on Sch A?

[scotttiger]

Hi,

I was unemployed this year, and thought this would be a great year to do IRA conversions for my wife and me, since we would be at a lower tax rate.

I also have medical bills that if I paid them off this year would be much greater than 7.5% of my household income (wife's salary, my severance, my unemployment, and dividends). However, I am wondering if I do the IRA conversion, will it jack up the income basis for the medical deduction calculation?

I was hoping to convert as much as I can to have an income minus deductions and stay just below $89,450 (filing jointly). This way, I convert and pay only 12% tax on the converted money. So, just fine tuning my conversion amount; if converting eliminates the medical deduction, then I have to reduce the amount converted because I would have a smaller deduction with no medical line item.

[VolvoGirl · Accepted solution]

Yes it will increase your AGI.  You can only deduct the amount of unreimbursed Medical Expenses you actually paid over 7.5% of your AGI.  And then all your itemized deductions have to be more than the standard deduction to get any benefit (so you would only be getting the benefit of the amount that puts you over the standard deduction).  And since the Standard Deduction is increased more people will not need to Itemize.

For 2023 the standard deduction amounts are:

Single 13,850 + 1,850 or 65 and over or blind

HOH 20,800 + 1,850 for 65 and over or blind

Joint 27,700+ 1,500 for each 65 and over or blind

Married filing Separate 13,850 + 1,500 for 65 and over or blind

[dmertz]

Right.  For every $1,000 of taxable Roth conversion, your medical-expense deduction would drop by $75, increasing your taxable income by $1,075, until either the medical-expense deduction reached zero or your itemized deductions dropped below the standard deduction.

If you receive Social Security benefits, the increase in AGI could also increase the taxable amount of these benefits that can potentially multiply the 12% tax rate up to 22.2%, a much greater effect than the change in the medical-expense deduction.

It's best to do a simulated tax return with your expected income to get an accurate estimate of how much you are willing to convert to Roth.  The CD/download version of TurboTax is easiest to use for such what-if analysis.  The online version can be used, but you'll need to establish a separate test account for the purpose and you won't have visibility to the details of the calculations, only to Form 1040 and Schedules 1 through 3.

[scotttiger]

Thank you.