Archive for the ‘Tax Issues’ Category

Mom is in an assisted living facility.  Mom and Dad both receive Social Security (total is about $20,000).  Dad receives a federal retirement system pension of $35,000. Because the assisted living facility costs about $3,800 monthly ($45,600 annually) and they have other unreimbursed medical expenses (mostly drugs) of $3,000, Dad has liquidated half of a $100,000 IRA and plans to liquidate the other half next year (because he read one of Bob’s blog posts that it would be cheaper to liquidate an IRA over time rather than in one year).  Unless Dad can figure out some tax deductions, Mom’s and Dad’s taxes are going to hurt.

He just might be in luck. Depending upon Mom’s condition (and with a bit of planning) the assisted living facility costs might be deductible.

The Tax Stuff

Section 213 of the Internal Revenue Code provides a tax deduction for medical expenses to the extent medical expenses exceed 7.5% of adjusted gross income.

Example:  If a married couple had gross income of $50,000 and adjusted gross income of $45,000, they would be able to deduct some of their medical expenses not paid for from other source like insurance if the medical expenses exceed 7.5% of $45,000 (which is $3,375). If they have medical expenses of $20,000, then they would be able to deduct $16,625 ($20,000 – $3,375).

Back to Mom and Dad and their potential whopping tax bill. The trick is to determine if Mom’s assisted living facility costs qualify as expenses for “medical care.” Clearly nursing home expenses are deductible, but assisted living is a bit less certain.

Section 213 says that “medical care” includes “qualified long-term care services.” Hmmm. What assisted living expenses might be “qualified long-term care services”?

Qualified long-term care services (according to Code section 7702B if you happen to be a Tax Code Junky) include diagnostic, preventive, therapeutic, maintenance, and other care services required by a “chronically ill individual” pursuant to a care plan prescribed by a licensed health care practitioner.

Is Mom Chronically Ill?

The key is to determine if Mom is “chronically ill” and to make sure you have a written plan of care prescribed by a physician, nurse, or other licensed medical practitioner.

To be “chronically ill” Mom must either (i) be unable to perform at least two activities of daily living (called ADLs) for at least 90 days, or (ii) require substantial supervision in order to protect her health or safety due to cognitive impairment (in other words . . . dementia). ADLs include eating, toileting, transferring (in and out of wheel chairs and beds), bathing, dressing and continence.

So, if Mom is unable to perform at least two of the ADLs for more than 90 days OR she has dementia and requires close supervision, she qualifies as “chronically ill.” Make sure to get the written plan!

If Mom is in the assisted living facility because she needs a “little help” Dad could have some problems. On the other hand, if Mom cannot get in and out of bed, bath and eat by herself, or if she is perhaps in the locked Alzheimer’s unit, Dad will be able to use the assisted living facility costs as a potential medical deduction.

Deductible Assisted Living Facility Costs

To return to Mom’s and Dad’s situation above, they have $48,600 of medical expenses (the assisted living facility costs and the unreimbursed drug expenses). If Dad figures adjusted gross income of, say, $90,000, then he can deduct the expenses over 7.5% of $90,000 ($6,750).

The deduction of $41,850 ($48,600 – $6,750) should help out a great deal!

You now realize Mom has to file a tax return because her gross income exceeds $10,950.  If ½ her Social Security benefits PLUS her income from all other sources is LESS than $25,000 (call it her “Combined Income”), but her non-Social Security income from all sources is more than $10,950, then she will have to file a tax return, although Social Security benefits will be untouched.  However, if her Combined Income (½ her Social Security benefits PLUS her income from all other sources) is greater than $25,000, then Social Security benefits are going to be taxed.

The question is:  If her Social Security is going to be taxed, just how much?

As a rule of thumb, if her Combined Income is between $25,000 and $34,000, then as much as 50% of the Social Security benefits will be considered taxable.  If her Combined Income is more than $34,000, then as much as 85% of her Social Security benefits will be considered taxable.

NO! That does not mean that she must pay 50% or 85% of her benefits as taxes . . . it means that up to 50% or 85% of her benefits will be treated like taxable income from other sources.

To figure out the amount of benefits taxable, fill out the Social Security Benefits Worksheet that comes in the instruction package for Form 1040.

Example:  Let’s say Mom worked constantly at Burt’s FastBurger and her W-2 shows gross income of $23,000. Her 1099-INTs show interest income of $3,000.  Her 1099-SSA shows Social Security benefits of $19,200.  Half her Social Security benefits is $9,600.  When added to her other income ($26,000) the sum is $35,600 . . . which is, of course, more than $25,000.  All that means is some of her Social Security will be taxed.

In fact, I filled out a worksheet for Mom and you can download it here (you can also mess around with it yourself). As you can see, $5,860 of Mom’s Social Security benefits are taxable.

That means that Mom’s gross income for the year will be:  $23,000 (Burt’s) + $3,000 (Interest on the CDs) + $5,860 (Taxable part of Social Security)  =  $31,860.

Mom (who is 70) is on Social Security and worked part time at Burt’s FastBurgers to earn a little extra and socialize a bit more than she might otherwise be able to (Dad died a few years ago and she likes to get out).

Of course, sometime in January she got a W-2 from Burt’s as well as a couple of 1099s with interest income on a number of CDs.  Being the good boy/girl that you always have been, you are gathering up a 1040, the 1099-SSA, the W-2, and other forms and getting ready to figure out Mom’s taxes.  But wait! Do you REALLY need to file?

You may not need to. If Mom’s “gross income” is less than $10,950 ($9,500 if she was under 65 . . . but she’s not) you might be able to find something else to do other than fill out Mom’s tax returns. By the way, had Mom been married, and both she and Hubby were over 65 and they were filing jointly, the magic “file/no file” number would have been $21,300, and if just one of them was over 65, the number would have been $20,150. But back to single Mom over 65: $10,950 is the magic number. The question is: How does the Social Security she received count?

Look at the 1099’s (except from Social Security) and the W-2 from Burt’s and add them up. Let’s say the Burt’s W-2 shows $6,500 gross income paid, and the 1099-INT forms from the banks show interest income on the CDs of $3,000. Mom’s total gross income from sources other than Social Security is $9,500.

Figure Out How Much The Social Security Might Count

Now take a look at Mom’s 1099-SSA. Let’s say Social Security paid Mom total benefits of $19,200 during the year. Divide that by half. That equals $9,600.

Add half the Social Security paid to the total of other income received by Mom. $9,600 + $9,500 = $19,100.

If half the Social Security benefits and the total of all other income is $25,000 or less, then none of the Social Security counts. In Mom’s case the number was $19,100 . . . which we all realize is less than $25,000. Therefore, Social Security will not enter the tax picture.

That Leaves Us With . . .

Mom had non-Social Security earnings of $9,500. You are able immediately to surmise that Mom’s “gross income” is less than $10,950. Stuff the W-2 and the 1099s back in the envelope to give back to Mom. Sweep the blank tax return forms into the trash. Go watch Dancing With the Stars . . . you’re off the hook!

What if Mom’s income from Burt’s and the CDs is $12,000, but when added to half her Social Security benefits is less than $25,000?  Or what if half of Mom’s Social Security and all other income exceeds $25,000? Turn off the TV, and read the next article. We have a little work to do.