How to Care For Two Parents At Once Without Going Broke

FROM WEALTHMANAGEMENT.COM

For years, Madeleine Smithberg has been at the forefront of American comedy as co-creator of "The Daily Show" and a talent coordinator for "Late Show with David Letterman."

That sense of humor was especially handy during the last few years. That is because Smithberg had to cope with not one, but two elderly parents in rapid decline.

"It's heartbreaking," says Smithberg, 56, who heads a production company in Los Angeles. "And yet it's invisible, because nobody talks about it."

Dealing with one aging parent is challenging enough, whether you are helping navigate the complex healthcare system, paying for an assisted living facility or struggling with cognitive decline as the parent slips away. But the emotional and financial stress can be more than double if you are caring for both parents at the same time.

"It's like having toddlers," says Smithberg, whose father passed away in 2014 after she moved her parents to Los Angeles. "They're hot, they're cold, they're hungry, they ask repetitive questions, and their needs become the most important thing in the world at that second... The biggest challenge of all is holding onto your patience."

According to a new study by Northwestern Mutual, the childrearing comparison is apt: 59 percent of Americans feel that taking care of two parents between ages 85 and 90 would be even harder than handling two kids between ages 3 and 5.

Caregivers may also have kids of their own. In that case, it's not just the "Sandwich Generation" - it's a Triple-Decker.

The Northwestern Mutual report found that 38 percent of those surveyed have not planned at all for handling the financial burdens of caring for elderly parents.

The costs can be gigantic: National median costs for an assisted-living facility are now $43,200 annually, according to insurer Genworth Financial in its annual Cost of Care study. A private room in a nursing home? $91,250.

That is more than enough to blow up any financial plan. The following is advice on how to care for your parents without going bankrupt yourself.

Long-Term Care

"Long-term care, long-term care, long-term care." That's the simple advice from Smithberg. Her father had taken out coverage for himself and his wife, which she calls "the best thing he ever did."

Long-term care insurance covers expenses for nursing home or home care if you become incapacitated - most of which is not covered by Medicare. The coverage, like the care, can be extremely expensive, and to be sure, it did not cover all of Smithberg's parents' assisted-living costs. But, combined with their own life savings, the policy has meant that she has not yet had to dip into her own savings to pay for their care.

Have the Talk

With the holidays right around the corner, it is one of the few times of year when far-flung families tend to gather in one place. Don't let the opportunity slip by to discuss your parents' expectations, should illness arrive. Find out if they have advance directives - documents that spell out what treatment they would and would not want during a life-threatening health crisis. Make sure you establish who has power of attorney, should they need someone to make important decisions.

"It's the perfect time to have this kind of conversation," says Kamilah Williams-Kemp, Northwestern Mutual's vice president of long-term care. Her spouse's grandmother lived to 102, and her mother-in-law has been diagnosed with Parkinson's.

Consider a Reverse Mortgage

Reverse mortgages allow homeowners aged 62 and above to borrow against their home equity and to receive either a lump sum, a series of monthly checks or a line of credit that can be tapped as needed. The upside of a reverse mortgage? With the bank paying you every month, instead of the other way around, that check can help cover costs for in-home caregivers.

Tom Davison, a financial planner in Columbus, Ohio, is working with a 90-year-old woman whose daughter moved in with her as a caregiver. "A reverse mortgage could help (the daughter) pay her the wages she has given up," Davison said.

The downside, of course: The family home will eventually become property of the bank.

Get Help

Your first instinct as a child may be to drop everything and handle all your parents' needs yourself. But if it comes at the cost of your own career, think about the ripple effects - on your retirement savings, on the needs of your own kids, even on your own sanity.

With Americans extending their lifespan - 76.4 years for men, 81.2 years for women, according to the National Center for Health Statistics - this is a family challenge that won't be going away anytime soon.

Denver financial planner Kristi Sullivan recommends hiring a case manager to do the heavy lifting.

"For an hourly fee, these people can handle tasks quickly that it might take you hours to do - scheduling doctor's appointments, handling medical payments and dealing with insurance, helping find a good nursing home or in-home care," Sullivan says. "Spending this money may seem expensive, but it's less than putting someone's career on hold to become a full-time caregiver."

Make These Moves by Year-End to Lessen Your Tax Burden

Each year in December, Congress meets and decides whether to extend certain tax provisions, but only for one year. They make the changes retroactive, and they expire at the end of the year that they are made.

This process can make tax planning hard, because we don’t know what the representatives and senators will do. However, individuals can take steps before year-end to mitigate their tax liability for 2015.

Here are a few tips that can save you money on your taxes.

Accelerate or defer your income

The end of the year sometimes offers the opportunity to decide whether to push income to the next year for tax purposes, called “deferring” income, or to take on additional income during that current year, called “accelerating” income.

Some circumstances call for deferring income. For example, let’s say your income in 2015 places you at the high end of the 25% tax bracket. In that case you may want to defer any year-end bonuses to 2016 to avoid slipping into a higher tax bracket.

Or if you are getting a divorce in 2016 and have children, you may want to defer income to 2016, when you would be filing as Head of Household and able to take advantage of a higher standard deduction.

At other times it makes more sense to accelerate income. If you know that you are going to receive a substantial raise in 2016, you may want to take that bonus in 2015, so that you don’t take a big hit in the 2016 tax year. Or if you plan to get married in 2016, you might want to accelerate your income to 2015, when you wouldn’t be subject to the marriage penalty, which refers to the higher tax burden for a dual-income married couple filing jointly.

Donate items to charity

Before the holiday season, many people thoroughly clean their homes because they will have family visiting from out of town. While you’re at it, why not go through all of your unwanted items and donate them to charity? Doing so would allow you to take a charitable deduction for the fair market value of what you donated.

Keep in mind that you don’t have to donate only old clothes, old cars or housewares. You can also donate the required minimum distributions from your IRA. People over age 70½ are required to take these distributions even if they don’t need or want them; in fact, taking these RMDs could cause taxpayers to be pushed into a higher tax bracket and make more of their Social Security income taxable.

You can instead donate your RMD directly to a charity of your choice. Because the RMD does not go directly to you, you would not have to claim it as income and would not have to pay tax on it. This provision expired at the end of 2014, but it should be extended through 2015.

Harvest your gains and losses

If you are carrying forward a capital loss, you may want to sell some securities in 2015 that have done well, and limit your tax exposure. This is known as “harvesting gains.” For instance, if you are carrying forward a $25,000 capital loss from 2014, you could sell up to $25,000 of stocks at a gain and it would effectively be tax-free.

The same goes for losses. If you sold securities in 2015 and made money, you should look for some securities in your portfolio that you could sell at a loss to offset your gains. This is known as “harvesting losses.”

Use your health savings account

Be sure to use the tax advantages of your health savings account, which enables you to set aside pre-tax money from your salary and use it for health expenses. If your medical plan has a minimum deductible of $1,300 and a maximum out-of-pocket cost of $6,450, for single individuals, you can contribute $3,350 to an HSA. If you are age 50 or over, you can contribute an additional $1,000.

If you have a family, and your minimum deductible is $2,600 with a maximum out-of-pocket cost of $12,900, you can contribute $6,650 to your HSA. If you are age 50 or over, you can contribute an additional $1,000.

These accounts aren’t just a good way to pay for health care in a given year. They also let account holders roll the funds over year after year and let them grow, tax-free.

As you start gearing up for the holidays, don’t forget that you can make your tax burden lighter. Talk to your tax advisor and see what makes sense for you.

Here’s Why You Shouldn’t Tap 529 Plans To Repay Loans

Funds in 529 college-savings plans can be withdrawn without incurring taxes and penalties if they’re used to pay for qualified education expenses including tuition and fees, required books and supplies, and eligible room and board. But families should think twice before tapping these plans to repay student loans.

The Internal Revenue Service classifies student loans as nonqualified education expenses, and the earnings portion of nonqualified distributions is subject to ordinary income tax at the beneficiary’s rate plus an additional 10 percent tax penalty.

The cost of taking a nonqualified distribution from a 529 plan to pay down student debt -- not including the 10 percent penalty -- is up to about $750 per $10,000.

“If a family has been saving from birth, about a third of the distribution will be earnings,” he says. “If a family started saving in high school, about 10 percent will be from earnings.” So with earnings ranging between $1,000 and $3,000 on a $10,000 distribution, beneficiaries in the 15 percent or 25 percent tax brackets can figure on paying additional income tax of $150 to $750 per $10,000.

When a child first enrolls in college, the family should plan how it’ll pay for each year in school, ncluding how much will be distributed from 529 plans. “With careful planning, the family should not have 529 plan money left over and student loans,” .

Tom Fisher, founder and principal of Fisher Financial Strategies, a Cambridge, Mass.-based independent RIA firm, suggests that parents target saving for the first three years of college in a 529 plan. “You don’t want to over-save and have money you can’t take out penalty-free,” he says.

Fisher, who estimates he has helped nearly half his 150 clients plan for college, encourages them to revisit their college-planning decisions every few years, in the context of their overall financial plan, as their children grow up and their post-high school plans become clearer. To estimate college costs, he suggests using the expected family contribution (EFC) calculator on the College Board website and the net price calculators on the websites of individual schools.

He thinks it’s better to spend 529 funds first before kicking into borrowing mode—particularly if a child may drop out of school.

Should families accumulate excess funds in a 529 plan, there are some options. Remaining funds can be used later for graduate school. The IRS also permits parents to shift funds between their children’s 529 accounts, says Fisher, and to designate a different family member as the beneficiary. This includes a parent seeking additional education, or a future grandchild. If a child receives a scholarship, the parent can withdraw up to the amount of the award from a 529 plan without paying a penalty, although income tax will be owed.

Fisher encourages parents to discuss college interests, expectations and finances with their children. What’s needed is “more meeting of the minds,” he says, “before starting to fork over money.”

Steps to Take Now to Make Filing Your Income Taxes Easier

FROM usnews.com

In mid-April, shortly after the income tax filing deadline for millions of Americans, we encouraged readers to begin planning for their 2015 return. Here’s another timely reminder, and this one is especially worth heeding: Steps you take between now and the end of the year can dramatically reduce your income tax burden in April and beyond.

If you’ve been planning all along, you’re in good shape. But if you need an extra jolt, now’s the time to set up an organization system (put it on your holiday wish list!), review your withholdings or research charities for end-of-year donations. Planning now can help you avoid costly mistakes.

First and foremost, Cari Weston, senior technical manager on the American Institute of CPAs tax staff, recommends dusting off last year’s paperwork.

“Pull out last year’s return and see which items were used for preparing the return, because that’s going to be your starting point for this year’s return,” she says. “Create a list of all the things you’ll need, and keep track of them as they all come in.”

If you’re not incredibly tech-savvy and you haven’t been using apps all year to track your spending and saving, there’s still the traditional approach: clean out a drawer, empty a basket or start a folder – almost anything will do as long as you keep all your records in one place.

While mortgage statements and W-2s can wait a bit longer, if you’ve been keeping all your receipts in a drawer, now’s the time to start sorting them. Weston recommends taking advantage of winter holidays to do a little bit at a time. “If you have itemized information, go through what you can now, on the holiday break, and sort them out by category,” she says. “Get them organized and total them as much as you can, so you can go to your [certified public accountant] with totals and still have supporting information if you need it.”

Kelley C. Long, a CPA, personal financial specialist, certified financial planner and a member of the National CPA Financial Literacy Commission, encourages her clients to run an income tax projection before the end of the year. “Your CPA is going to be the easiest way to go about running the project. If you’re not working with one, go to TurboTax or the IRS website [and] fill out a tax form for yourself. That can help you get organized,” she says.

Long adds that by playing with the figures, taxpayers can get a sense of how and where they need toscale up or back on their deductions.

“Start asking yourself questions: What happened this year that’s new that I didn’t have last year?” Weston says. “Did you have or adopt a child this year? Did you send a kid off to college? Do you go yourself?” A new job, a refinanced mortgage or a student loan that’s finally paid off represent a change to your income tax return. 

Long also suggests offsetting capital gains by selling some stocks at a loss if your portfolio increased in value this year, and consider making an extra mortgage payment or pay next semester’s college tuition before Jan. 1 to help save on taxes.

While April 15 might seem far in the future, you really only have a few weeks left for certain tasks. If you’ve waited to buy your accountant a cup of coffee to discuss your finances, act soon, or that coffee may now have to be ordered to go. 

“If you’re someone who has a more complicated return, hopefully you’re hearing from your CPA, and they’re telling you to go see them now,” Weston says. “If not, you should call them.” While a late-year chat with a tax advisor can be a smart move for any taxpayer, it’s especially important for the self-employed, those with rental properties or anyone falling outside the parameters of a standard W-2 return.  

If you don’t have a CPA or tax preparer, or you aren’t especially keen on the one you have, now’s also a good time to begin looking for one. Don’t just check online; ask friends or family members who might be a good fit. If your records and filings are all digital, having an accountant who only works via snail mail and telephone will be an incredibly frustrating experience. If you’re nearing retirement, having an accountant who focuses on the millennial set might not be the best fit.

Not hiring a CPA anytime soon? Now is also a great time to try out different online tax-prep software to see which one is right for you.

Some Difficult But Important Conversations To Have This Thanksgiving

FROM FORBES.COM

Thanksgiving is right around the corner and with it comes family gatherings and overindulging. While I enjoy a good turkey dinner as much as anyone else, let’s not forget that the holiday is really about being thankful for our loved ones and not taking them for granted. I was recently reminded of this when I read the story of a woman named Chanel Reynolds. Her husband went for a bike ride one day and ended up in the hospital after being hit by a van. Chanel was forced to make the difficult decision of removing his medical support after she was told that he had no chance of recovery, leaving her a single mom.

With all her trauma and grief, what pushed her “over the edge” was the stress of not knowing basic things such as how much life insurance he had, if his will was valid or even what the password to his phone was. To help others avoid the same fate, Chanel created a website that provides a checklist of steps to take to get your stuff (although Chanel uses a more attention-grabbing word in the name of her site) together, free templates for basic estate planning documents, a free “Monthly Nudge” email newsletter, and links to other resources. We all know we need to get our “stuff” together, but sometimes it takes a story like that to motivate us to act.

Even if we know the importance of it, it’s easy to procrastinate since we always think we have more time…until it’s too late. So after enjoying a wonderful Thanksgiving dinner, make the time to have some important family conversations with those who may be directly affected. After all, there may be few other times when you’re all together. Tell your family your wishes – what type of medical care you’ll want when you can’t talk for yourself, what you want your final services to be like, who you want to raise your minor children, and how you want your possessions handled. Then help make sure your wishes are actually carried out with this checklist of documents and insurance policies:

A health care directive includes a living will specifying your wishes for end-of-life care and a health care proxy or power of attorney appointing someone to make health care decisions for you if you’re unable to.

A durable power of attorney appoints someone to make financial decisions and manage your money on your behalf. If you make it “springing,” it would only take effect if you’re incapacitated.

Disability insurance can replace up to 60% of your income if you’re unable to work. See if it’s offered through your employer since it’s generally much more expensive on the individual marketplace. In deciding how much you need, just keep in mind that the benefits are taxable if your employer is paying for it and tax-free if you are.

A will can designate who inherits your assets and perhaps even more importantly, who would be the guardian of any minor children you may have.

Beneficiary designations on any retirement accounts, HSAs, education savings accounts, and life insurance policies you have trump your will and allow those assets to pass on directly to your beneficiaries without going through the time and cost of probate. This is especially important if you live in one of these states with high probate fees.You can also generally add beneficiaries to a bank account by asking them for a POD (payable on death) form and to an investment account by asking for a TOD (transfer on death) form. In some states, you can even add beneficiaries to real estate with a beneficiary deed and vehicles with a TOD registration with your DMV.

A living trust can prevent any remaining assets from going through probate and establish more complex rules for administering and passing on your estate.

Life insurance can close the gap between what your dependents will receive from their inheritance and pension and Social Security survivor benefits and the income they will need. For any additional coverage you need, compare the cost of getting it  through your employer (check to see if it’s portable or able to be taken with you if you leave your employer) with the cost of purchasing it individually.

An ethical will isn’t a legal document but a way to convey personal stories, messages, or explanations to your loved ones after you pass away.

In addition to Chanel’s site, you may be able to draft any documents you need through your employer. Many employers offer a basic estate planning document drafting program for free or through a pre-paid legal benefit. The latter can also include discounted attorney services for reviewing any documents you create on your own and for drafting more complex documents like a trust.

Otherwise, you can find an estate planning attorney through referrals from family, friends, or other professionals you work with, through your local bar association’s lawyer referral service or through estate planning organizations like the American Academy of Estate Planning Attorneys and the National Network of Estate Planning Attorneys. It’s a good idea to interview at least three before picking the person you’re most comfortable with. You can find some questions to ask prospective attorneys here.

Finally, all the perfect documents and insurance policies won’t do much good if your loved ones can’t easily locate them when needed. Make several copies of your documents and give one to the executor of your will, your trustee, and your powers of attorney. Keep another copy with your other important documents, like your life insurance policies, titles and deeds, and a list of your accounts along with usernames and passwords. You can use an online storage site, like MyDirectives. The Doc Safe, Everplans, and AfterSteps,  but don’t forget to communicate how to login to that site as well. That way, if something happens to you, your loved ones can carry out your wishes as easily as possible.

I know these are not always comfortable topics to think about and discuss. However, the only certainty is that some type of estate plan will be needed someday. When that time comes, having your “stuff” together can really make things much easier on your loved ones and they’ll be thankful you did.

Don't miss tax opportunities before year end

April 15 is months away, but what you decide to do (or not do) before the Dec. 31 parties are complete will make a huge difference in your results come 2016 tax day! This can be especially true if you are a business owner.

The main focus should be on planning your results. Taking expenses in a down year can make the expenses less valuable than taking them in a high-tax bracket year. Also in planning, consideration of cash flow needs will greatly reduce the risk of a bad surprise at April 15. The goal of planning should be in tax reduction and business cash flow planning.

Several topics should be considered now instead of when talking to your tax professional in 2016.

The list below is not exhaustive but these could have a large affect on tax results.

• Charitable contribution planning including consideration of a donor advised fund

• Asset purchases for business

• Timing of paying expenses and possibly income recognition for tax reduction and cash flow planning

• Harvesting stocks losses for capital gain reduction

• Consideration of year-end employee bonuses

For those with charitable interest, there are many potential approaches to affect 2015 taxes. They can run from short-term considerations like cleaning out a closet and donating to various organizations who appreciate clothing, furniture and other non-cash gifts. Or if you give monthly to a church or other group, you could consider accelerating January gifts into December.

Gifts of appreciated stock or other appreciated assets get a deduction for the fair market value of the gift. Plus you do not pay tax on the gain. This option is much better than selling the stock and then giving the cash to the charity.

If you want to consider a larger gift, but you do not want to give control to the charity all at once, you could select to fund a private foundation or you could contribute to a donor advised fund. The determination of which strategy is best for you is based upon your long-term desires and goals. Utilizing a qualified and experience adviser is critical in making these decisions.

For the business owner, consideration of asset needs for the business is always important. If new assets will be added within the next few months, accelerating the purchase whereby the assets can be “placed in service” by year end could allow large deductions in 2015. Code Section 179 can provide a full deduction of the cost of these assets even if purchased with a note and little or no cash is expended in 2015.

Business owners should also consider whether bonuses will be paid in the next few months. If so, paying or accruing by year end could accelerate deductibility depending on their method of accounting (cash versus accrual).

Also, accelerating payment of or incurring of expenses before Dec. 31 can easily improve results for April 15. If the business is on a tax cash method of accounting, then paying expenses before year end causes those to be deductible in 2015, instead of in 2016. If it is on an accrual method, payment does not cause deductibility, and the incurrence of cost is determinant.

Another planning thought is to consider stock positions held, if you have capital gains to report in 2015. Many times investment advisers can consider held positions that are in a loss position and sell those by the end of the year, while replacing those with economically similar positions whereby avoiding “wash sales” rules, allowing you to reduce capital gains taxes for 2015. This strategy is used by many investment advisers and CPAs annually.

The above strategies and planning tools (along with other approaches) should be considered each year end, with the main goal of maximizing results, planning cash flows and reducing the risk of financial surprises when taxes are filed.

Lessen Your Tax Bite With Savvy Year-End Strategies

Death and taxes may be two of life's major certainties, but just as healthy living can help extend your life, savvy tax moves can help boost your tax savings – as long as you make them before Dec. 31.

There are no significant tax changes looming as 2015 winds down, which is good news. However, that's no reason to slack on your year-end tax planning.

There are myriad strategies that can be used to lessen your tax bite, from more basic maneuvers to shave a few bucks off your tax bill to more sophisticated estate-planning tactics, which for some could amount to millions in savings.

"There are various things to look at from deferring income to accelerating deductions to managing net investment income tax," said Jordan Niefeld, a CPA and certified financial planner with Raymond James & Associates.

"Working with someone who knows what they're doing really helps," because they can tailor a strategy that fits with your overall financial plan, he said. Using someone in your state is also particularly important, as state tax laws can vary considerably.

"Expense everything you possibly can, and write the checks out before the end of the year so you can get them as a deduction in 2015." -John McManus, founder of McManus & Associates

The following are some strategies that experts recommend considering before the end of the year.

Harvesting tax losses: Tax-loss harvesting involves selling securities in your portfolio at a loss to offset capitals gains. "With a turbulent market, harvesting losses is the first thing you should look at," said Peter Maniscalco, a CPA and founder of accounting firm Maniscalco & Picone.

Maniscalco added that harvesting is particularly important this year for people who own mutual funds in taxable accounts. When markets are volatile, as they have been, people get nervous and withdraw money from funds.

Save on taxes while saving on your medical bills

Often, the portfolio manager has to sell appreciated securities to meet those redemptions, which triggers a capital gains distribution that investors have to pay taxes on. Selling other securities in your portfolio at a loss can offset those gains, thereby lessening or eliminating that tax burden.

Accelerate deductions: An easy way to cut your tax bill is to bulk up on your deductible expenses.

"Expense everything you possibly can, and write the checks out before the end of the year so you can get them as a deduction in 2015," said John McManus, founder of trusts and estates law firm McManus & Associates. This includes deductible payments for rent, phone bills and car payments, he added.

You should also pay your January 2016 mortgage bill in December so you can deduct that mortgage interest, as well. Second mortgages, home equity loans and lines of credit count, too; however, be aware that deductions are limited, depending on factors such as the total value of your mortgages. Credit card balances don't need to be paid by year-end as long as the charges were made in 2015.

Catch up on contributions: If you haven't maxed out contributions to your 401(k) or 403(b) retirement plan, consider doing so before year-end to lower your taxable income, said Niefeld at Raymond James & Associates. Additionally, if your employer offers a match – many will match your contributions dollar-for-dollar up to 4 percent or 5 percent – take advantage of it. "Not doing so is leaving free money on the table."

According to Maniscalco at Maniscalco & Picone, other things to take advantage of before the end of the year include "cafeteria plans," which let you withhold some of your pretax salary for certain expenses, and 529 plan contributions; states such as New York allow for a $10,000 deduction.

Be benevolent: Charitable giving is a great way to boost your deductions. In some cases, you may consider gifting stocks that have appreciated, said Niefeld at Raymond James.

For example, if you bought a stock for $5 and it's now worth $10, you could donate that. You'd get credit for the full $10 even though you only paid $5, and the recipient gets the full value. "This is a savvy way to think outside the box. … You won't have to liquidate a stock, pay the tax and then donate the money."

Get your big gifts in: There are two types of gift exemptions: the annual gift exemption, which in 2015 allows you to give up to $14,000 to as many people as you want tax-free; and the lifetime exemption, which allows you to pass up to $5.43 million to heirs tax-free.

Experts suggest getting in your annual gifts before the year is over if you haven't already, and then making next year's gifts on Jan. 1 to maximize the time the money has to grow in the recipient's account.

McManus of McManus & Associates also suggests making larger gifts now (to go toward your lifetime exemption), in case the exemption amount is lowered in the future. One strategy he employs is gifting into a Grantor Retained Annuity Trust (GRAT), which effectively allows you to loan assets to loved ones, which they pay back with interest.

"It's almost as if you owned an apartment building with income, which you sold to your kids," he said. "Then they took a mortgage from you and used the [building] income to pay you back over several years.

"You get the loan paid back, and they get the property," he added. "If rates are lower, the deal is even better for those receiving the gifts."

Settle estimated taxes with an IRA: If your taxes aren't withheld through payroll (often the case with business owners) you're probably paying "estimated taxes," which are due each quarter. Not paying these on time can result in interest charges and penalties.

However, McManus said, if you catch up on your payments in the last quarter of the year, you can avoid paying any additional fees if you settle up using IRA distributions.

Regardless of the tax strategies you're considering — and there are plenty more that aren't as dependent on year-end deadlines — experts say it's critical to make sure they complement your overall financial plan and what you're trying to achieve.

How to Get the Most When Deducting Medical Expenses on Income Taxes

FROM http://www.cpapracticeadvisor.com/

Some tax observers refer to the medical expense deduction as “Mission Impossible.” Granted, it’s difficult for most taxpayers to clear the annual threshold for deducting medical and dental expenses, but it’s still possible. And, in the event that a client is close to qualifying for a deduction, or has already qualified, some year-end tax planning can generate extra tax benefits.

Effective for 2013 and thereafter, a taxpayer may deduct qualified medical and dental expenses in excess of 10 percent of adjusted gross income (AGI). Previously, the threshold was 7.5 percent of AGI. What’s more, the cost of qualified expenses must be reduced by any insurance reimbursements. Because the deduction threshold is so high, many of your clients won’t be in line for a deduction.

The threshold has remained at 7.5 percent of AGI for taxpayers who are age 65 or older. But this reprieve only lasts through 2016. Beginning in 2017, all taxpayers will be subject to the 10 percent-of-AGI limit.

For this purpose, “qualified expenses” are payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body. This includes health insurance premiums and a portion of premiums paid for long-term care insurance policies, based on the insured’s age. Other expenses that are often deductible are:

• Examinations by doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners;

• In-patient hospital care or nursing home services, including the cost of meals and lodging charged by the hospital or nursing home;

• Acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, participation in a smoking-cessation program and drugs to alleviate nicotine withdrawal if they require a prescription;

• Weight-loss programs for a specific disease or diseases, including obesity, diagnosed by a physician (but usually not for health food items or payment of health club dues for general health);

• Insulin and prescription drugs;

• Reading or prescription eyeglasses or contact lenses, false teeth, hearing aids, crutches, wheelchairs, and for guide dogs for the blind or deaf; and

• Transportation to obtain medical treatment (e.g., fares for taxis, buses, trains and ambulances). If you use your own vehicle, you can deduct the portion of actual costs attributable to medical travel if you have the records or you can an IRS-approved flat rate (23 cents per mile in 2015 plus tolls and parking fees).

Year-end action: Crunch the numbers in 2015. If you’re close to or already above the annual limit, you might accelerate elective expenses into this year. For instance, you may be able to move a physical exam or routine dental cleaning scheduled for January into December. This could put you over the threshold or increase your deduction. Conversely, if you have virtually no shot at a medical deduction for 2015, you may as well postpone non-emergency visits to next year and assess the situation again at the end of 2016.

Tax planning ideas for singles

Sorry, but singles — especially business owners — struggle with special tax problems; all bad when compared to their married friends. During life: No joint return; only a $14,000 gift exclusion per year per donee (instead of $28,000 when married). At death: No marital deduction to stop the estate tax cold when the first spouse dies; only $5.43 million estate tax-free (instead of $10.86 million free if you are married).

Well, here comes a true-tax tale of a single business owner (Joe).

Joe (a vigorous 68 years young and single) operates his business (a C Corp., Success Co.) with his only son Sam. He has three daughters — none in the business. Aside from Success Co., Joe's taxable estate includes these significant assets — land and building, (worth $1.2 million) which he leases to Success Co., a $3.4 stock and bond portfolio and two life insurance policies — one for $. 5 million owned by and payable to Success Co., and one for $1.6 million owned by Joe and payable to his kids equally.

We divided Joe's tax plan into two parts — lifetime planning and death planning. Following are the significant points of each plan.

The lifetime plan:

1. Immediately transfer the real estate and the investment portfolio to a family limited partnership (FLIP). Now the property is only worth $2.99 million for estate tax purposes because of the wonderful FLIP discount rule. Good move! Joe's taxable estate is reduced by $1.61 million.

We also created a long-term lease for the real estate between Joe and Success Co. The terms include giving Sam an option to buy the property after Joe dies.

2. Immediately give voting control of Success Co. (after a tax-free recapitalization of voting and nonvoting stock) to Sam. Joe is comfortable with this action, and it greatly reduces (about 40 percent) the value of Success Co. for estate tax purposes. That 40 percent is a big deal if you own all or a portion of a family business. For example, Joe's business with a real value of $3 million is worth only $1.8 million for tax purposes. A $1.2 million discount … yielding estate tax savings of about $480,000. Wow!

3. Every year gift $14,000 of Success Co. nonvoting stock to Sam and an equal $14,000 to each daughter of limited partnership interests in the FLIP.

4. Transfer the $. 5 million life insurance policy from Success Co. to Joe.

5. Next, gift both insurance policies to his daughters. This gets $2.1 million ($.5 million plus $1.6) out of Joe's estate.

6. Elect S Corp. status, so Joe can take tax-free dividends (also escapes payroll taxes) from Success Co. in addition to his salary, which will decrease as he continues to slow down.

The death plan: Not much to do. Just a simple will and trust leaving Joe's estate equally to the four kids. But appropriate adjustments must be made for the gifts completed during his life — the stock and the insurance — so that each of his kids is treated equally (to Joe that means "fairly").

What's the final result of Joe's tax plan? It will reduce his income tax and payroll taxes during every year of Joe's life and will reduce his potential estate tax liability from over $1.7 million to zero. The most important part of this tax story is that the plans outlined above work no matter how large your estate might be. Whether you are single or married. Whether you are insurable or not. If you are single, your estate planning is much more challenging than for a married couple.

Year-End Tax Planning for Next Tax Season

FROM ACCOUNTINGTODAY.COM

It’s never too late in the year for you and your clients to get ready for next tax season.

Greg Rosica, a tax partner at Ernst & Young and a contributing author to the EY Tax Guide, has some useful advice for year-end tax planning.

“As we start to wind down the 2015 tax year with just a few weeks left, it’s important that people start to think about what their tax situation is going to be for 2015, before they actually sit down and start to do their tax return next year in 2016,” he said. “There may still be some things that they can do.”

Among the items to ponder are the dozens of expired tax breaks that Congress has not yet renewed for this year.

“There are many provisions that continue to get extended each year that did expire in 2014, but as they stand right now, they are no longer in place for 2015,” said Rosica. “Unless something gets brought up in the budget and is passed as an extenders bill, which certainly is possible, those are no longer here for us.”

Some of the perennial tax extenders include the ability for schoolteachers to take an above-the-line deduction for classroom supplies that they have purchased on thei own, the ability to take a deduction as interest for mortgage insurance premiums, the ability to take a deduction for sales tax instead of income taxes for taxpayers who live in states with low income taxes or who had many sales tax expenses, and qualified charitable distributions that people with IRAs can give directly to a charity. Even if those were valid deductions in prior years, they might not be this year if Congress fails to extend them.

“You want to be aware when you sit down to do your 2015 tax projection for the end of the year that you’re not taking deductions for them at this point because they aren’t valid deductions,” said Rosica. “Hopefully that will change by the end of the year, but we don’t really know. I think the first step right now is to sit down and take out last year’s tax return for 2014 and start to sketch out, maybe on a copy of that, what you have thus far for 2015 and see if things are different. If you think you might be in alternative minimum tax this year, if you were last year and you have similar income and expense items, there’s a good chance you will be again, or if something has changed in our life, that you take that into account as to what type of tax bracket you’ll be in.”

Clients should understand their tax bracket. “Have you reached the upper tax brackets? Maybe you’re typically in a higher tax bracket, but based on some stock losses you may have this year, that’s perhaps kept you down in a lower bracket,” said Rosica.

He advises looking at the big picture. “Start with a projection of what 2015 is going to look like and then assess what actions you should take, whether accelerating income into this year or deferring income into next year is a good strategy for you,” he said. “Then move on to deductions. Are you going to get the benefit of deductions this year, things like charitable deductions and real estate taxes? Many of those are within your control as to when you’re going to incur those kinds of things, whether you make estimated state income tax payments at the end of the year, or wait until the beginning of next year. Identifying what kind of benefit you get out of those is a great thing to be doing over the next few weeks to determine where you think you’re going to end up.”

The end of the year is a good time for high net worth clients to decide what to do about estate planning. “You want to use your annual gift exclusion, where you're eligible to give up to $14,000 a year to as many people as you choose,” said Rosica. “It expires every year if you don't use it by December 31. Make sure you've thought through that and made the appropriate gifts that you want to make during the year. It’s also a good time to look to see what lifetime exclusion you have left. If you've done some gifting that might eat into  it, look at what that is, and if you want to do some additional gifting or not. Then also take into account that there are potentially some tax regulations that may come out to deal with taking discounts on certain types of assets that are gifted. It’s important to understand that and see how it fits into the potential planning that you may be doing around year-end.”

The Affordable Care Act will be an important part of tax planning for some taxpayers. “With the Affordable Care Act comes the tax penalty if you don’t have health insurance, and that’s higher this year than it was last year,” said Rosica. “If you were subject to that penalty because you didn’t get health insurance, then you’re going to have a higher penalty if you still haven’t done it. I’d be focused on that if you’re in that situation.”

Another issue associated with the Affordable Care Act is the Net Investment Income Tax, a 3.8 percent tax on investment-type income, such as interest, dividends and capital gains  “If your income has gone up, in 2015 you may enter the bracket that includes the Net Investment Income Tax,” said Rosica. “Perhaps you haven’t been in that before, so keep your eyes out for any changes from prior years and start to think through what additional taxes might affect you.”

He advises looking back over any major changes that might have occurred in a client's life over the course of the year. “Reflect back on what’s happened throughout 2015, whether you’ve changed jobs or gotten married or divorced, or had any kind of life event change,” said Rosica. “It’s a good idea to start thinking about what those events, are as well as what impact they have on your overall tax situation.”

Consider every option in year-end tax planning

As another calendar year comes to a close, it’s time again for last-minute year-end tax planning. True, there is just over a month left in 2015, but there is still time to take advantage of some smart planning.

Consider upping your retirement contributions to the maximum allowed amount. Annual contribution limits into common plans like 401(k), 403(b), or 457 plans are $18,000 in 2015. Or, if you are over the age of 50, you can make a catch-up contribution of an additional $6,000. For a simple IRA, the limits are $12,500 for anyone below age 50 and $15,500 for those over age 50. And the contribution limits are $5,500 for a traditional or Roth IRA, or $6,500 for those over 50.

Charitable contributions may be made up until the end of the calendar year. If you itemize your deductions, you may generally deduct up to 50 percent of your adjusted gross income, although 20- and 30-percent limits apply in some cases. Contributions of appreciated assets can be particularly beneficial inasmuch as you can generally both write off the appreciated value of the asset while avoiding capital gains on the appreciation – a win-win for both you and the charitable endeavor.

Be sure to make use of any money you set aside in a flex spending account throughout the year. While funds in a health savings account will generally carry over into the next year, funds in a FSA will be lost if not used in time. While the rules on what constitutes a qualified purchase have tightened a bit, items such as bandages, eye care, home diagnostic tools such as blood pressure monitors and thermometers, joint braces, incontinence products, and over-the-counter medications prescribed by a licensed health care professional can all qualify.

If you have a business, you still have the opportunity to time some moves to best help your bottom line. Depending on the nature of your business, you may shift taxable income into 2016 by delaying billing or the provision of goods or services into the new year. Similarly, you can accelerate deductible expenses into 2015 by doing things like upping the business use of a vehicle that doubles as a personal vehicle, or acquiring new equipment and supplies (that you would be purchasing anyway) in 2015.

Last, but certainly not least, make sure you are taking advantage of every available deduction. Do you work from home? Travel for work? Pay interest on student loans? Have a child in day care so you can work? Have medical bills that exceed 10 percent of your adjusted gross income for the year? Pay tuition? The list of available deductions seems endless. Talk to your tax preparer or, at least, do your own research to make sure you have captured all deductions that might apply to your situation.

They say the only certainties in life are death and taxes. But, with a little planning and forethought you can keep a little more of your money in your pocket into 2016.

Deducting sports tickets as a business expense? Know the rules

If running a business while also rooting for your favorite sports team isn’t stressful enough, business owners who assume they can write off the cost without checking the rules could be setting themselves up for some extra heartbreak.

No matter the season, it’s still common practice for business owners to mix business and entertainment at a sporting event. Business owners have learned over time they can sometimes close a deal or win over a prospect more readily when the conversation is moved to an atmosphere that’s a little more relaxed than a corporate boardroom.

The Internal Revenue Service has clamped down, however, on taxpayers who deduct the costs of such entertainment as a business expense. It’s not as simple as buying the tickets and showing the receipt to claim a deduction. The IRS has established some criteria for when it believes tickets to a sporting event might logically constitute a legitimate business expense.

First, the IRS says the sporting event must be tied directly to the conduct of business. That means the company claiming the deduction must show that some sort of business took place at the sporting event.

The IRS goes a little further, though, to provide some additional criteria. One important one: The IRS finds it hard to believe any business activity could have occurred if the company simply gave the tickets away to a client or prospect.

That means someone representing the business must actually be present at the event in order for the deduction to be allowed as a business expense. Otherwise it is treated as a gift, where the tax rules are different.

Also important: The IRS finds it difficult to imagine business would actually be conducted at the sporting event itself, given the many distractions. It seems examiners have a hard time believing anyone would focus on the particulars of a business deal with superstars like LeBron James sinking three-pointers amid throngs of screaming fans and other blaring distractions.

This suggests any attendance at a sporting event must be accompanied by some other stop along the way to an atmosphere a little more conducive to business. That could mean a stop at the office on the way to or from the event, or even a nearby restaurant or sports bar.

The IRS also has some limited language around when tickets are deductible if they are used by family members. The rules allow a deduction for tickets used by spouses of individuals involved in the business transaction, but it does not specify any other family members. Some might argue that tickets used by related children might also be deductible, but that might depend on the facts and circumstances of the specific event.

If the tickets are to a suite, that adds another layer of analysis to the deductibility of expenses. IRS rules limit the deduction to the face value of non-luxury box seats, and it allows for the highest-value non-luxury seat price to be used as long as those seats are available for the general public to purchase them.

Suite pricing typically includes some combination of tickets for admission, food and beverage service, advertising costs, and fees to use the suite.

The venue may need to provide some itemization for the taxpayer to sort out what portion of the suite cost goes to food and beverage expense that is deductible. However, that deduction is limited to 50% of the cost when the tickets are used and the event is properly documented.

Even in the uncertain sports environment from season to season, doing business at a game is still common practice.

Winning the tax deduction is a better bet for business owners who know the rules ahead of time.