What You Should Know About Medicaid Planning

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What You Should Know About Medicaid Planning

You’re active and in relatively good health. You’re finally enjoying the things you now have time to do as a retiree – or looking forward to those days coming soon. The last thing you want to think about is how you’re going to pay for long-term care.

Not only does this issue seem so far removed from your current lifestyle, but it’s a daunting one to think about.

However, those over age 55 can’t escape the fact that the longer they live, the likelihood increases that some type of long-term care service will be needed. It’s a real possibility that as people age, costs for in-home or nursing home care could consume their life savings. Not only is there a concern about having sufficient income to meet these needs, but the legacy they spent years building to pass on to loved ones could be easily devoured.

According to 2018 projections of health-care costs, a healthy 65-year-old couple today will need over $385,000 to pay for health-care costs during their remaining years. In light of this, another study revealed that nearly 80% of middle-income Baby Boomers have no savings assigned for long-term care. Even more alarming, over 80% of this segment also expressed that long-term care planning was currently not a high priority for them.

Medicare to the rescue?

Many are under the assumption that Medicare will help cover long-term care costs. This is a myth. Medicare is a federal health insurance program seniors receive at age 65 or older. Although it will help cover short-term nursing home costs after a major medical incident, it will not cover long-term care in nursing homes, assisted living facilities or at home.

What about Medicaid?

Medicaid is a combined federal and state health insurance program intended for low-income people and covers medical care costs and some types of long-term care costs. However, each state has its own eligibility requirements. The rules and standards established by each state are strict, so it’s not easy to qualify. Applicants must meet an asset limit amount designated by their state, which can often be an unattainable standard. Many find they must exhaust their assets by paying outright for nursing home care before they can be eligible for Medicaid.

How does the Medicaid “Spend Down” work?

Particularly for the elderly, a common option to qualify for Medicaid assistance is to “spend down” excess, non-exempt assets below the required state limits. As long as assets aren’t given away or sold for significantly less than they’re worth, most spending is fine. However, some methods of transferring assets such as gifting or using non-exempt assets to purchase other non-exempt assets could put someone in violation of state rules, so it helps to seek professional counsel in this area.

Consider the Medicaid “Look-Back Rules”

Unfortunately, spending down assets is not as straight forward as it looks since Medicare has set up an additional hurdle called the “look-back rules.”

Under the look-back rules, all qualifying assets must be transferred over five years (60 months) from the date of the Medicaid application. Any non-exempt assets held within this time period will be counted as ownership and a waiting period will be incurred before someone can qualify. The rules for calculating the waiting period are complex, but eligibility is generally denied until the look-back period is free of transfers of less than fair market value. States are strict, so it’s imperative applicants keep detailed records to prove where assets were placed in order to qualify.

Beware the future claims against your estate

Some assets are exempt from qualifying for Medicaid such as cars, personal belongings and primary homes. However, after you die, it’s likely the state will place a claim against your estate if you received long-term care through Medicaid while over age 55. This process is known as Medicaid estate recovery. However, if you still have a living spouse, minor children or disabled children, it will not attempt to do so. Only in the case of a living spouse will the state recover its costs from your estate once he or she dies.

The best plan is having a plan

Unfortunately, it’s impossible to put a dollar amount on the actual cost of someone’s long-term care. But one thing is for sure. The sooner you start planning, the better your options for the future. Whether it’s for you or a family member, it’s a good idea to obtain professional advice from a trusted estate planning attorney and/or financial advisor to get started and make sure you’re headed in the right direction.

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When Can In-Home Care be Deducted as a Medical Expense?

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When Can In-Home Care be Deducted as a Medical Expense?

The U.S. Tax Court provided some insight into the question of the deductibility of in-home care of a disabled individual. The case involved an elderly woman with dementia who stayed in her home with assistance from caregivers, rather than live in a nursing home. The IRS disallowed medical expense deductions and the taxpayer’s estate took the matter to court.

As people age, they may need full-time care. It could be on a short-term or long-term basis and it could be in-home rather than a nursing facility. In one case, the U.S. Tax Court overruled the IRS and allowed amounts paid to a decedent’s caregivers as a medical expense deduction.

Facts of the case: Lillian Baral died at the age of 92. Her brother, David, handled her personal and financial affairs under a power of attorney during the last years of her life.

Baral’s primary care physician during a six-year period diagnosed her as suffering from dementia. Medical records showed she was not compliant taking her prescription medicines. Following one hospitalization, she was evaluated to determine if she was taking her medications and whether it was safe for her to live alone in her New York home. A medical summary indicated:

1. Baral’s ability to communicate orally was impaired.
2. She was confused.
3. Assistance was required with activities of daily living.
4. She required supervision due to her memory deficit.
5. She was at risk of falling and, therefore, could not be left alone, and
6. Baseline homecare services were required. The doctor determined Baral required assistance and supervision on a 24-hour basis for medical reasons and for her safety.

Her brother first engaged a company to provide the required assistance. The caregiver assisted Baral in bathing, dressing, making trips to the doctor, taking medications, and transferring to a wheelchair. After a couple of months, her brother hired the caregivers (and a substitute) directly. The caregivers also paid for some of Baral’s miscellaneous expenses and submitted receipts to her brother for reimbursement. The caregivers were paid $49,580 for their services and reimbursed $5,566 for expenses during the year at issue.

The Court noted the caregivers were not licensed healthcare providers, and the payments to them were not for the diagnosis, cure, mitigation, treatment, or prevention of Baral’s disease. However, the amounts paid to the caregivers were deductible if their services were qualified long-term care services.

“Qualified long-term care services” means necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner. A “chronically ill individual” means an individual who has been certified by a licensed health care practitioner as:

- - Being unable to perform at least two of six specified activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of at least 90 days due to a loss of functional capacity;
  - Having a level of disability similar to the level of disability as determined under IRS regulations; or
  - Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

A licensed health care practitioner is a professional including a physician, registered professional nurse and licensed social worker. An evaluation of Baral showed that she required assistance with activities of daily living but did not specify which activities of daily living. Thus, while the doctor hadn’t certified that Baral met the activities-of-daily-living level of disability, he diagnosed her as suffering from severe dementia. In other words, she was cognitively impaired. Her cognitive impairment prevented her from properly taking her prescription medicine. Failure to take prescribed medication posed a risk to her health.

Baral’s doctor certified she required substantial supervision to protect her from threats to her health and safety due to her severe cognitive impairment. Therefore, she met the third test above.

“Maintenance or personal care services” means any care that has the primary purpose of providing needed assistance with any of the disabilities that result in the individual’s qualifying as a chronically ill individual, including protection from threats to health and safety due to severe cognitive impairment. As explained, an evaluation showed that Baral required supervision and a doctor determined she required 24-hour-a-day supervision to protect her from threats to her safety and health. The Court concluded the services were qualified long-term care services as defined in the tax code.

The Court held the $49,580 paid to the caregivers for services qualified as long-term care services and deductible as medical care. The Court did not allow a deduction for the $5,566 paid to the caregivers for out-of-pocket expenses because they were not adequately documented. (Estate of Lillian Baral et al., 137 T.C. No. 1)

Tips for Successful Deductions

The good news is that the taxpayer secured a deduction for the full cost of the services of the caregivers. But not all taxpayers are so lucky. Keep the following in mind.

Consider the size of deduction. In this case, the deduction was just under $50,000 for one year’s care. You could be looking at several years of care for higher annual amounts. That means the deduction is likely to be worth a considerable amount. It also means there’s a good chance the IRS will question it. Be prepared.

Get a doctor or other qualified health care professional’s written evaluation.The doctor may not be available at audit, so a second opinion might be a good idea. Make sure the evaluation meets the requirements in the tax law.

Keep good records and file the proper tax form. Pay by check, made out to the caregiver. If you have to pay cash, get a receipt. For out-of-pocket expenses, keep the receipts. Provide the caregiver with a W-2 if an employee or a 1099 if an independent contractor.

Keep a diary. It helps to substantiate expenses. Have the caregivers do the same.

Know the difference between medical versus household help. You can only deduct amounts paid to a caregiver for nursing-type services, not for household cleaning. Unless you separately pay a maid, it may be difficult to convince the IRS all payments were for care. An allocation has been allowed in some cases.

Be aware of the employment tax implications. If you employ a caregiver directly, you’re probably liable for employment taxes.

Consult with your tax advisor. The dollars involved are probably large enough to make sure you’re complying with all the requirements.

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Fear Factors in Elder Care Planning

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Fear Factors in Elder Care Planning

The fear of many elderly individuals — perhaps even yourself or someone in your family — is that nursing home costs will consume their life savings before they can be passed to their heirs. This concern is real and has spawned elder care planning strategies designed to minimize the damage.

Background: Medicaid is a health care assistance program for elderly, blind, and disabled people in financial need. It covers nursing home costs, but it’s not easy to qualify for assistance.

The median annual cost of nursing home care in the U.S. is now $92,345 (for a private room) and can soar to over $280,000 (in Alaska, which has the most expensive nursing home care in the United States).– 2016 survey sponsored by Genworth Financial

Generally speaking, an individual may own only a few assets — a car, certain personal belongings, a small amount of savings — and have a minimal income stream. The exact amounts are established by individual states. Since these standards are often unattainable, the assets of a nursing home resident may be exhausted by fees before becoming eligible for Medicaid.

Therefore, one typical objective of elder care planning is to “spend down” below the state Medicaid limits to qualify for assistance.

Traditionally, this has been accomplished through direct gifts made to other family members or by transferring assets to a trust that provides minimal payouts. However, there’s yet another hurdle: The Medicaid “look-back rules.”

Under the look-back rules, assets transferred within 60 months of the date of the relative’s application still count towards determining Medicaid eligibility. (The period is 36 months for transfers made before February 8, 2006, as long as they were not made to or from a trust.)

If the look-back rules apply, there is a waiting period before a relative qualifies for assistance. The rules for calculating the waiting period are complex, but eligibility is generally denied until the look-back period is free of transfers of less than fair market value.

Important issues: Some states are strict in asking Medicaid applicants to prove where assets went with detailed records. A few states also want to toughen the Medicaid nursing home eligibility rules so that the look-back period is six years for all assets.

Despite this pessimistic outlook, planning opportunities exist on a state-by-state level. You may be able to take advantage of certain exceptions to the strict rules for Medicaid assistance. For example, in certain cases, nursing home applicants do not have to sell their homes to qualify for Medicaid. And transferring assets to certain people, such as a disabled child, does not trigger a period of Medicaid ineligibility.

It is generally recommended that people begin elder care planning for assets while they’re still healthy. This is an area of where professional advice from your attorney is critical.

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Deductible Medical Expenses for Seniors

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Deductible Medical Expenses for Seniors

The older people get, the more medical expenses they tend to incur. The only saving grace is the expenses may add up to a federal income tax deduction. Specifically, you can deduct medical expenses you are not reimbursed for to the extent they exceed 7.5% of your adjusted gross income (AGI) for 2018 (and 2017). However, the write-off is only available if you itemize using Schedule A of Form 1040.

What if you pay medical expenses for an elderly relative? You can add those expenses to your own for tax deduction purposes if the relative is your dependent, which means you pay over half of that person’s support for the year and he or she does not file a joint federal income tax return. (Source: Internal Revenue Code Sec. 213(a)) However, you must still clear the 10% of AGI hurdle to claim any deduction.

Common Medical Expenses for Seniors

Here’s an alphabetical list of costs that seniors might be likely to incur that count as medical expenses for itemized deduction purposes:

- - Acupuncture
  - Ambulance service
  - Artificial limb
  - Artificial teeth
  - Bandages
  - Braille books and magazines
  - Car – special equipment so disabled person can drive.
  - Chiropractor
  - Christian Science practitioner
  - Crutches
  - Dental care including X-rays, fillings, braces, extractions and dentures.
  - Diagnostic devices
  - Drugs – prescription only except for insulin.
  - Eyeglasses and contact lenses, including wetting and cleaning solutions
  - Eye surgery to treat defective vision, such as laser eye surgery or radial keratotomy.
  - Guide dog
  - Hearing aid
  - Home improvements for medical purposes to the extent they don’t add value to the home, including constructing ramps, widening doorways, modifying stairways, etc.
  - Hospitalization
  - Insulin
  - Insurance premiums for health coverage including age-based premiums for qualified long-term care insurance.
  - Lifetime care fees – percentage of fees paid under a contract with retirement facility.
  - Long-term care services
  - Meals while staying in a hospital or similar facility.
  - Medicare Part B premiums
  - Nursing home
  - Nursing services
  - Operation (surgery)
  - Optometrist
  - Osteopath
  - Oxygen
  - Psychiatric care and psychoanalysis
  - Stop smoking program
  - Telephone costs of special equipment for the hearing impaired.
  - Television – special equipment to display subtitles for hearing impaired.
  - Therapy
  - Transplant
  - Transportation to receive medical care at the prevailing cents per mile rate.
  - Weight loss program if part of treatment for specific disease or condition, such as obesity.
  - Wheelchair, including operating and upkeep.
  - Wig if hair loss is due to medical condition or treatment.

(*Source: IRS Publication 502, Medical and Dental Expenses)

The itemized federal tax deduction for medical expenses can be meaningful for elderly people who have high expenses and relatively low adjusted gross incomes. Again, don’t forget that you may be entitled to deduct medical expenses that you pay for an elderly loved one who is your dependent as defined above.

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Expecting Medicaid or Government Benefits? Consider a Hybrid Trust

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Expecting Medicaid or Government Benefits? Consider a Hybrid Trust

Is this your situation? You worked hard all your life. You saved for a rainy day and retirement. Now, you are at that time in your life where you need to consider what may happen to your assets if you must apply for government assistance for your medical needs.

Consider developing an estate plan to help protect your assets so you can still qualify for medical care such as Medicaid or other government benefits. One way is by using a hybrid trust.

Trust Basics

There are many different types of trusts. Here are two ways to categorize them based on distribution methods:

- - In a fixed trust,the grantor determines the exact distribution that each beneficiary will receive as set forth in the trust document.
  - In a discretionary trust, the trustee has the option to make various decisions. For example, the trustee may be able to select the beneficiaries using a certain criteria set forth in the trust instrument. Or the trustee may have discretion in the amount of money each beneficiary will receive, either as a capital or interest distribution.

A hybrid trust combines elements of fixed and discretionary trusts. In a hybrid trust, the trust terms require the trustee to pay certain amounts of the assets to each beneficiary that the grantor determined when setting up the trust. However, the trustee has discretion in distributing other trust assets after making the fixed payments.

This can be an appropriate trust (among other possibilities) to use if an elderly person wants to receive government benefits. You must structure the trust properly and adhere to the rules pertaining to government benefits. If structured properly, the trust could help ensure you receive benefits. The rules are quite complicated if an individual is eligible for not only Medicaid, but also is receiving Social Security benefits and/or Medicare. Sometimes, in these situations, an estate plan requires a combination of trusts or a trust that is structured to help an individual qualify for the various governmental benefits.

When creating a hybrid trust, you must make it irrevocable, meaning you cannot change it. You give the trustee the title and control of property that you own so you can attempt to qualify for government benefits in the future and still be able to supplement your income. Usually, the restrictions are on use of the interest and/or principal.

If you create a hybrid trust properly, you can make your assets exempt from Medicaid and be allowed to keep current disability benefits. You must be aware of any “look back” periods, such as the Medicaid look back period. The Deficit Reduction Act of 2005 sets forth that the look back period is 5 years. However, each state must pass its own laws to conform to the federal statute or set another period of time. For example, in California, Medicaid is known as “Medi-Cal” and the current Medi-Cal look back period is 30 months. Any money transferred within the look back period of your application would result in a penalty of ineligibility up to the amount transferred.

Consult with your estate planning adviser for more information in your situation.

Veteran’s Benefits

A hybrid trust is also a legitimate estate planning instrument to protect assets if you intend to receive veteran’s benefits. The Veteran’s Administration (VA) does not penalize people for transfers of assets. Thus, many people gift assets to a trust and still qualify for benefits. The VA has no “look-back” period. This allows a person to be eligible for VA benefits quickly.

The only limiting factors are:

- - How the assets are held;
  - How quickly you can transfer the assets; and
  - Whether you are either competent to direct the transfers or have provided someone with a power of attorney that permits large gifts.

To qualify quickly, you may want to consider transferring your assets to another person directly and have that person transfer the money into a hybrid trust for your benefit.

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Important Issues You Should Know in Medicaid Planning

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Important Issues You Should Know in Medicaid Planning

What’s your worst financial nightmare? For many elderly people and their families, it’s seeing a lifetime’s worth of savings evaporate in a short period of time if one spouse, or both, is forced to move to a nursing home or some other facility. It’s not unheard of to spend up to $100,000 a year or more for the care of a person who needs assistance with regular daily activities. Even if you’re financially secure, that can drain bank accounts in a hurry.

If you’ve been prescient and have acquired long-term care insurance coverage, the payouts can provide a measure of relief, but benefits are typically capped under the terms of the policy. Where else can you turn? If you qualify, you may be eligible for Medicaid benefits, but you generally have to reduce your savings to near-poverty levels. This common scenario has spawned the concept of “Medicaid planning.”

Basics of Medicaid

To begin this discussion, it’s important to distinguish between Medicare and Medicaid, because the two are often confused. Medicare, which is a federal program and essentially provides health insurance to retirees, covers up to 100 days of “skilled nursing” care per event. However, the definition of “skilled nursing” and the other requirements are strict, so few nursing home residents ever receive the full 100 days of coverage. As a result, Medicare covers only a fraction of the nursing home costs incurred around the country.

On the other hand, Medicaid is often used to pick up the slack where long term care insurance and other programs leave off.

Medicaid is the overall name for the separate state public medical systems (including Puerto Rico) that provide free or low-cost medical and long-term nursing home care for poor, indigent, and qualifying mothers and infants.

The federal government provides substantial subsidies to the states under the auspices of Medicaid, but each state has flexibility to set their own eligibility criteria. Therefore, the requirements may vary widely from state to state.

In addition, both the individual states and the federal government continue to tinker with the rules, further complicating matters. For example, on the federal level, the Deficit Reduction Act of 2005 revised the requirements relating to asset transfers by nursing home residents.

Medicaid funding in each state is generally very limited, though, and each state has strict requirements for eligibility. While specifics vary by state, eligibility criteria generally centers around two basic tests — assets and income.

While the very poor and very wealthy tend to have few problems accessing care, things are much trickier for lower-income families whose incomes and assets are not low enough to qualify. A severe and expensive medical event or a need for long-term care can be a devastating financial blow to uninsured families and seniors.

For example, a number of states have “relatives’ liability” or “filial support” laws that require adult children to pay bills for impoverished parents. While this is unusual, it may become more common in the future, as nursing homes and states look for more revenue in the face of rising numbers of Baby Boomer patients.

Medicaid planning is the practice of preserving a family members’ assets and working to ensure that they can legitimately qualify for as much assistance as possible.

When properly done, Medicaid planning does not involve hiding assets to qualify for assistance. Instead, it helps families position and spend down assets in a way that legally preserves their eligibility for benefits.

The traditional strategy is simple enough. By “spending down” your assets, you can bring yourself below the state threshold needed to qualify for Medicaid assistance. For instance, you might pre-pay funeral expenses for yourself and other family members or pay for more care at home. The funds are then removed from the calculation of assets for Medicaid purposes.

The exact amount of money an individual is allowed to have before qualifying for Medicaid depends on the state and the person’s marital status.

Years ago, some forward-thinking senior citizens gave away large sums of money and/or appreciated property to younger relatives as part of an overall spend-down strategy. But current law generally hinders this technique. Under the Deficit Reduction Act of 2005, state Medicaid administrators will “look back” for 60 months to count transfers as available resources for nursing home care.

Previously, the look-back period was only 36 months, although the 60-month look-back period already applied to transfers to trusts. (The 36-month look-back period continues to apply to transfers made before February 8, 2006.)

As you might imagine, trusts often play a critical role in Medicaid planning. However, if you establish a revocable trust (one that may be changed or rescinded by the one who created it), the trust assets will count towards Medicaid eligibility. Thus, revocable trusts are not worthwhile in this area. If properly structured, however, an irrevocable trust where you give up control can be structured to remove the assets as an available resource. Note: These arrangements are extremely complex and numerous variations exist. Your attorney can explain the applicable rules in more detail.

Any strategy involving transfers of assets must take other factors into account. For example, once you hand over assets to your children, the property is theirs to keep and you can’t legally require them to use it to help pay for your expenses. Whatever your children’s intentions, they might encounter problems due to bankruptcy, divorce or lawsuit. Any of these events could jeopardize your savings. Also, funds that are legally owned by your adult children might affect the college financial aid available to your grandchildren.

For all these reasons, planning ahead for long-term care is important. This article is only a brief summary of several critical issues involved in Medicaid planning. The best approach is to arrange a consultation with an attorney experienced in this branch of the law.

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Don’t Overlook Write-Offs for Medicare Premiums

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Don’t Overlook Write-Offs for Medicare Premiums

Many seniors (and their families responsible for filing tax returns for them) have gotten into the habit of just claiming the standard deduction instead of itemizing. That’s because seniors typically pay little or no mortgage interest, and they usually don’t owe much for state and local income and property taxes either. So the most common itemized deductions often amount to little or nothing.

Plus, folks age 65 and older get larger standard deductions. All that said, claiming the standard deduction may not be the right answer if an older taxpayer has significant medical expenses.

As you may know, medical expenses can only currently be deducted by seniors to the extent they exceed 7.5% percent of adjusted gross income (AGI) for 2017 and 2018 (down from 10% thanks to the passage of the Tax Cuts and Jobs Act of 2017). In adding up expenses, don’t make the common mistake of forgetting to count Medicare insurance premiums. Together with other out-of-pocket costs, Medicare premiums can easily put you over the percent-of-AGI threshold and also cause an older taxpayer’s total itemized deductions to exceed the standard deduction amount.

Here’s how to find out if a tax bill can be reduced by itemizing.

Identify Outlays that Count as Medical Expenses

To figure out if you have enough medical expenses to benefit from itemizing, add up the following.

1. Premiums for Medicare Parts B, C, and D Coverage. Seniors enrolled in Medicare can count premiums for Medicare Part B coverage (for medical costs other than hospital bills), Part C coverage (for Medicare Advantage policies), and Part D coverage (for prescription drugs) as medical expenses:

- - - For most people, the 2018 the Part B premium is $134.00 per month (or about $1,608 per year) and could be as high as $428.60 per month ($5,143 per year). If both you and your spouse are covered, these amounts could double.
    - Part C premiums depend on the plan, but they can be several thousand per year for each covered person.

Higher-income individuals pay a monthly Medicare Part D surcharge in addition to the plan amount. For 2018, these surcharges range from $13.00 per month to $74.80 per month for each covered person (up from $12.70 to $72.90 in 2017).

These Medicare coverage premiums are generally withheld from Social Security benefit payments. If so, you can find the premium amounts for each year on Form SSA-1099 (Social Security Benefit Statement), which beneficiaries should receive shortly after the end of each year.

1. Premiums for Supplemental Medicare Coverage (Medigap Insurance). Seniors can also count premiums paid for private Medicare supplemental insurance policies (often called Medigap coverage) as medical expenses. The cost depends on the plan, but annual premiums can easily amount to $1,000 to $2,000 per covered person or more.
2. Premiums for Qualified Long-Term Care Coverage. Premiums for qualified long-term care insurance also count as medical expenses, subject to age-based limits. For each covered person, count the lesser of: the actual premiums paid for the year or the age-based limit from below.

Age on 12/31/18	Maximum Deductible Amount
61 to 70	$ 4,160 ($4,090 in 2017)
Over 70	$ 5,200 ($5,110 in 2017)

1. Out-of-Pocket Medical Expenses. Many seniors also incur significant out-of-pocket outlays due to insurance co-payments and deductibles and for dental and vision care. Be sure to add these into the mix.
2. Medical Expenses Paid for Relatives. Did you pay health premiums or uninsured medical expenses for a qualifying relative this year? If you did, count these outlays too. For a person to be your qualifying relative, you generally must pay over half of his or her support for the year, and the person must be your adult child, son-in-law, daughter-in-law, grandchild, father, stepfather, father-in-law, mother, stepmother, mother-in-law, brother, stepbrother, brother-in-law, sister, stepsister, sister-in-law, aunt, uncle, niece, or nephew. It doesn’t matter if the relative lives with you or not.

Add Qualifying Medical Expenses and Subtract 10% of AGI

As mentioned earlier, most Medicare participants can claim itemized deductions in 2017 and 2018, for medical expenses to the extent the expenses exceed 7.5% of AGI. For example, say your 2017 AGI is $80,000, and you have $15,000 of medical expenses from the preceding list. Your itemized medical expense deduction is $9,000 [$15,000 minus $6,000 (7.5% of your $80,000 AGI)].

Do the Final Calculations

As you can see, you can claim a significant itemized deduction for medical expenses (even after subtracting the percent-of-AGI threshold), the next step is to identify any other potential itemized deductions for the year. These can include (among other things):

- - State and local income and property taxes (including taxes on cars, boats, and other personal property).
  - Home mortgage interest (if any).
  - Charitable contributions.

Add these to your medical expense deduction, and see if the total exceeds your standard deduction amount of:

- - For 2018, $12,000 if you are unmarried, but $13,600 if you are unmarried and 65 years or older as of December 31, 2017 ($7,900 in 2017).
  - For 2018, $24,000 if you file jointly, but $26,600 if both you and your spouse are 65 or older as of December 31, 2018 (in 2017, $15,200). The 2018 amount is $25,300 if only one spouse is 65 or older as of year end ($13,950 in 2017).
  - For 2018, $18,000 if you use head-of-household filing status, or $19,300 if you were 65 or older as of December 31, 2017 (up from $10,900 in 2017).

Obviously, if your total itemized deductions exceed the applicable standard deduction amount, you should forgo the standard deduction and instead claim itemized deductions, on Schedule A of Form 1040, when you file your return.

Note: If a senior taxpayer is self-employed and qualifies for the self-employed health insurance deduction (available for itemizers and non-itemizers), you may be able to add Medicare health insurance premiums to your self-employed health insurance deduction. Contact your tax adviser if this issue affects you.

You May Be Eligible for a Refund

If you do the calculations explained in this article, you may discover that itemizing is the way to go. If you failed to itemize for earlier years, you can usually recoup the tax savings for up to three earlier years by filing amended returns and receiving a refund. However, it’s much easier to simply get it right the first time. Contact your tax advisor if you’re interested in filing amended returns or want additional information.

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Can I Give My Children the Home and Still Qualify for Medicaid?

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Can I Give My Children the Home and Still Qualify for Medicaid?

Q: I want to give my home to my children now and yet continue living there for as long as possible. Will I still be eligible for Medicaid if I need nursing home care in the future?

A: You might be able to accomplish this by transferring your home to your children with a life estate deed. This gives you the right to live there for the rest of your life. For most purposes, you continue to be considered the owner of the home. For example, you would still be responsible for the payment of taxes, insurance and maintenance.

To determine whether the life estate deed will affect eligibility for Medicaid, the following must be considered:

When you transfer the asset (known as the “lookback period.”) The Deficit Reduction Act of 2005 set forth that assets transferred within 60 months preceding the Medicaid application date are considered for federal eligibility purposes. (The period was 36 months for transfers made before February 8, 2006, as long as they were not made to or from a trust.) Each state must pass its own laws to conform to the federal statute. For example, in California, Medicaid is known as “Medi-Cal” and the current Medi-Cal lookback period is 30 months.

The value involved. The transfer is not considered to be for the full value of the house but the “remainder interest.” This is the right that your children have to receive the home automatically upon your death. The value of the remainder interest is calculated using IRS actuarial tables based on your life expectancy.

The penalty period. In general, if a transfer of assets for less than fair market value is found, Medicaid payment for nursing facility care (and some long term care services) will be withheld for a period of time referred to as the penalty period. The number of months of ineligibility is calculated by dividing the value of the gift by the average monthly cost of nursing home care.

Social services officials cannot require you to liquidate the life estate or to rent the life estate interest property. However, if you do rent out the property, any net rental income you receive will be counted in determining eligibility for Medicaid. Also, if you sell the property, the proceeds or fair market value are counted as a resource for determining Medicaid eligibility.

There are many reasons why a life estate deed may be a better option for you than an outright gift by a regular deed, including these six advantages:

1. The property still qualifies for any property tax exemptions, such as veteran and senior citizen exemptions that were available prior to the transfer.
2. You don’t lose all legal rights to the property.
3. Your children can’t make you move out of the house.
4. Your children’s creditors or bankruptcy trustee can’t take possession of the property.
5. Capital gains taxes when your children sell the home will be calculated on a “stepped-up basis,” which means they will be based on the value at the date of your death rather than your original cost basis.
6. Since the value of the remainder interest is lower than the full value of the house, it will result in a shorter Medicaid penalty period than an outright transfer.

Since Medicaid law is very complex and constantly changing, it is critical to get legal assistance before taking any action.

Exceptions

Keep in mind that an outright transfer of assets to some people does not affect Medicaid eligibility. Those people are:

- - Your spouse.
  - A minor, blind or disabled child.
  - A sibling who has an equity interest in the home and resided there for at least one year immediately before the date of institutionalization. An “equity interest” is evidenced by being named on the deed, having paid monthly mortgage payments, or having made capital improvements.
  - An adult child who resided in the home for at least two years immediately before the date of institutionalization.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Tax-Smart Cash Flow Solution for Seniors with Appreciated Homes

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Tax-Smart Cash Flow Solution for Seniors with Appreciated Homes

Many older people own hugely appreciated homes but are short of cash. A side effect of large appreciation is the fact that selling the property to raise cash will trigger a gain well in excess of the federal home sale gain exclusion (up to $500,000 for joint-filing couples and up to $250,000 for unmarried individuals). The federal and state income tax bills could easily reach into the hundreds of thousands of dollars, and all that money would be gone forever.

Thankfully, there’s a potential solution that involves taking out a reverse mortgage on your property instead of selling. That way, you can take advantage of the tax-saving basis step-up rules explained below.

Basis Step-Up Rule to the Rescue

If you continue to own your residence until you or your spouse’s death, the result could be a greatly reduced or maybe even completely eliminated federal income tax bill when the property is eventually sold. This taxpayer-friendly outcome is thanks to Section 1014(a) of the Internal Revenue Code which generally allows an unlimited federal income tax basis step-up for appreciated capital gain assets owned by a person who passes away.

Under this rule, the income tax basis of most appreciated capital gain assets, including personal residences, are stepped up to fair market value (FMV) as of the date of death (or the alternate valuation date six months later, if applicable). When the value of an asset eligible for this favorable rule stays about the same between the date of death and the date of sale by the decedent’s heirs, there will be little or no taxable gain to report to the IRS — because the sales proceeds will be fully offset (or nearly so) by the stepped-up basis. Good!

How the Basis Step-Up Rule Works with a Residence

Here’s how the basis step-up rule plays out in the context of a greatly appreciated personal residence.

If you are married and your spouse predeceases you, the basis of the portion of the home owned by your departed mate, typically 50%, gets stepped up to FMV. This usually removes half of the appreciation that has occurred over the years from the federal income tax rolls. So far, so good. If you then continue to own the home until you pass away, the basis of the part you own at that point, which will usually be 100%, gets stepped up to FMV as of the date of your death. So your heirs can then sell the property and owe little or nothing to the U.S. Treasury.

Of course, if you’re unmarried and own the home by yourself, the tax results are easier to understand. The basis of the entire property gets stepped up to FMV when you pass on, and your heirs can then sell the residence and owe little or nothing to Uncle Sam.

Special Basis Step-Up Rule in Community Property States

If you and your spouse own your home as community property, the tax basis of the entire residence is generally stepped up to FMV when the first spouse dies (not just the 50% portion that was owned by the now-deceased spouse). This weird-but-true rule means the surviving spouse can then sell and owe little or nothing to the government.

In other words, if you turn out to be the surviving spouse, you need not hang onto the property until death to reap the full tax-saving advantage of the basis step-up rule. But if you want to hang on, there’s no tax disadvantage to doing so.

The Reverse Mortgage Strategy

As you can see, holding onto a hugely appreciated residence until death can save a ton of taxes thanks to the basis step-up rule. However if you need cash right now to keep going, we have not yet solved that part of the equation. Enter the reverse mortgage.

Reverse Mortgage Basics: When you take out a regular home loan, you must make monthly principal and interest payments to the lender. With a reverse mortgage, the lender makes one or more payments to you, the borrower. No payments to the lender are required until a triggering event occurs — such as when you move out or die. Meanwhile, the accrued interest builds up, and the loan balance gets larger rather than smaller. That’s why it’s called a reverse mortgage!

Taking out a reverse mortgage can give an older homeowner access to needed cash without selling the property. In fact, many seniors won’t qualify for a conventional “forward” home equity loan or home equity line of credit because they lack the requisite income. If you fit into this category, taking out a reverse mortgage may be the only way to convert some of your home equity into cash without selling and taking a big tax hit.

You can receive reverse mortgage proceeds as a lump sum, in installments over a period of months or years, or as line-of-credit withdrawals when you need cash.

These days, most reverse mortgages are home equity conversion mortgages, or HECMs, which are insured by the federal government. You must be at least 62 years old to qualify. The maximum amount that can be borrowed under an HECM is $625,500. The exact lending limit depends on the value of your home, your age, and the amount of any other mortgage debt against the property. To give you an idea, a 65-year-old can usually borrow about 25% of his or her home equity. The percentage rises to about 40% if you’re 75 and to about 60% if you’re 85.

Interest rates can be fixed or variable depending on the deal you sign up for. Rates are somewhat higher than for regular home loans, but not a lot higher.

As we stated earlier, a reverse mortgage does not require any payments to the lender until you move out of your home or die. At that time, the property is usually sold, and the reverse mortgage balance is paid off out of the sales proceeds. Any remaining proceeds go to you or your estate.

Reverse Mortgage Fees

Fees to take out and maintain a reverse mortgage will usually be considerably higher than for a regular “forward” home equity loan or line of credit. With an HECM, you will usually pay an origination fee equal to 2% of the first $200,000 of your home’s value plus 1 percent of any value above $200,000. However, the origination fee cannot exceed $6,000.

You will also be charged a first-year FHA mortgage insurance premium (MIP) equal to either 0.5% or 2.5%, depending on the terms of the loan. Over the life of the loan, you annual MIP premiums will equal 1.25% of the loan balance.

In addition, the lender can charge a monthly servicing fee of $30 to 35. Typically, you will also get socked with the familiar third-party home mortgage closing costs for things like title insurance, an appraisal, settlement services, and so forth. All these amounts are tacked onto the reverse mortgage balance.

Keep in mind: The reverse mortgage market is evolving. You’ll need to do some research to find the best product for your specific circumstances.

Deducting Reverse Mortgage Interest

The first $100,000 of reverse mortgage principal will often qualify as home equity indebtedness under the federal income tax rules. If so, you can claim an itemized deduction for the related interest expense because it will meet the definition of qualified residence interest.

In general, however, no interest deduction is allowed for alternative minimum tax (AMT) purposes unless you use the reverse mortgage proceeds to acquire, construct, or improve a first or second home. You would not typically use reverse mortgage proceeds for those purposes.

In any case, you can’t deduct reverse mortgage interest until you actually pay it in cash (assuming you’re a cash-basis taxpayer). Because reverse mortgage interest is just added to the loan principal, no payment of interest actually occurs until the loan is paid off. That may be many years down the road. For this reason, reverse mortgage interest usually doesn’t deliver much of a tax benefit. However, as explained earlier, hanging onto your greatly appreciated home until death could save a ton in taxes.

The Bottom Line

You might object to the notion of borrowing against your home to solve a cash flow problem. Fair enough, but the cash you need must come from somewhere. If it comes from selling your hugely appreciated home, the cost of getting your hands on the money will be a big tax bill.

In contrast, if you can get the cash you need by taking out a reverse mortgage, the only cost will be the fees and interest charges. If those fees and interest charges are a small percentage of the taxes that you could permanently avoid by continuing to own your home, the reverse mortgage strategy may make perfect sense.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Understanding the Basics of Medicare

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Understanding the Basics of Medicare

Many older Americans rely on the Medicare program for their primary health care coverage. Medicare is the federal program that helps pay medical bills for people 65 years and older, as well as people with certain disabilities and those who suffer from permanent kidney failure. It should not be confused with Medicaid, which is for low-income people.

The Medicare program is divided into two parts: Under Part A, seniors are eligible for hospital insurance while Part B covers medical insurance.

Depending on where you live, you may have more than one Medicare plan to choose from. It is important that you choose the plan that is best for you, so you may need advice from your doctor.

Here are eight basic facts about Medicare Part A coverage to help guide your decision:

1. If you or your spouse paid Medicare taxes while you were working, you’re eligible for Part A coverage for free. If you’re not paid Part A, you can also enroll in Part B, for which you pay an additional monthly premium. For 2018, the Part B premium is $134.00 a month (up from $109.00 in 2017) if your annual income is $85,000 or less and you file an individual tax return ($170,000 when filing jointly). People with higher annual incomes pay eligible because you or your spouse do not have enough quarters of Medicare-covered employment, you can pay a monthly premium in 2018 of up to $422, depending on your income. (This is up slightly from $413 in 2017.)

2. If you enroll in paid Part A, you can also enroll in Part B, for which you pay an additional monthly premium. For 2018, the Part B premium is $134.00 a month ($109 in 2017) if your annual income is $85,000 or less and you file an individual tax return ($170,000 when filing jointly). People with higher annual incomes pay higher premiums.

3. Medicare Part A covers a portion of your costs for a semi-private room during your stay in a hospital, skilled nursing facility or hospice. It also covers some home health care.

4. Medicare only helps pay for skilled nursing home care, not custodial care in which a patient needs help with such daily tasks as walking, dressing and eating. For Medicare to cover the facility’s charges, the patient must require daily skilled nursing or skilled rehabilitation services which can be provided only in a skilled nursing facility.

5. Medicare Part A can only help pay for nursing home care following a related hospital stay of at least three days in a row.

6. If you’re covered by Medicare Part A, you still must pay an initial hospital stay insurance deductible before Medicare will pay anything. For 2018, this deductible is $1,340 for the first 60 days per benefit period (up from $1,316 in 2017).

7. After the deductible, Medicare Part A pays only certain amounts of a facility’s bill. The amount depends on whether the facility is a hospital, psychiatric hospital or skilled nursing facility or whether care is received at home or through a hospice.

8. The amount that Medicare Part A pays depends on how many days of inpatient care you have during a benefit period.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

What You Should Know About Medicaid Planning

Medicare to the rescue?

What about Medicaid?

How does the Medicaid “Spend Down” work?

Consider the Medicaid “Look-Back Rules”

Beware the future claims against your estate

The best plan is having a plan

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