Month: October 2016

Smart Strategies for Social Security Benefits Taxes

The issue of whether your Social Security benefits are taxed is based on your "provisional income." This is your adjusted gross income—not counting Social Security benefits—plus nontaxable interest and half of your Social Security benefits. 10-31-16

Kiplinger’s recent article, “5 Ways to Avoid Taxes on Your Social Security Benefits,” explains that if it's below $25,000 and you file taxes as single or head of household (or less than $32,000 if you file a joint return), you won't owe taxes on your benefits. So if your provisional income is between $25,000 and $34,000 and you're single, or between $32,000 and $44,000 if you file jointly, it means that up to 50% of your benefits may be taxable. If your provisional income is more than $34,000 for a single or more than $44,000 if married filing jointly, up to 85% of your Social Security benefits may be taxable.

Here are a few strategies that can help you keep your income below the thresholds and decrease the part of your benefits subject to tax.

Donate your RMD to charity. Those who are 70½ or older can give up to $100,000 annually to charity from their IRAs tax-free. This gift counts as the required minimum distribution (RMD) but isn’t included in adjusted gross income.

Purchase a QLAC. You can invest up to $125,000 from your IRA or 401(k) in a special version of a deferred-income annuity known as a Qualified Longevity Annuity Contract (QLAC). Money in a QLAC isn’t considered in calculating your RMD. As a result, you can reduce the size of your RMD, lower your income and decrease your tax bill. Payouts don’t start for several years. It can be as late as age 85 when they’ll be included in your taxable income.

Withdraw money from tax-free Roth IRAs. Tax-free withdrawals from a Roth IRA or Roth 401(k) aren’t calculated as part of your AGI. If you roll over money from a traditional IRA or 401(k) to a Roth prior to receiving Social Security benefits, you can avoid taxes later in retirement. You are required to pay income taxes in the year of the conversion, but you can use the funds tax-free after that.

Review income investments. Structure your portfolio to minimize the income it generates when that income is being reinvested because you're recognizing income you don't need. This means taxes you don't want to pay! Consider a growth-oriented portfolio and remember that nontaxable interest, like interest on municipal bonds, is included when calculating the taxes on your Social Security benefits.

Examine your tax moves. If your income is well over the $44,000 threshold, there is probably not much you can do to get below that level. But don't focus only on Social Security taxes—look at overall tax-efficiency.

Reference: Kiplinger (July 2016) “5 Ways to Avoid Taxes on Your Social Security Benefits”

Make Certain Your College-Bound Kid Has Packed a Health Care Power of Attorney

You thought you purchased just about everything for your child for college, but don’t forget one more important item: a health care power of attorney or health proxy.

When a child turns 18, parents don’t have much authority under federal law to remotely access medical records or make decision. With the medical privacy law HIPAA, you 10-28-16need to have your child’s written permission.

CBS News’ recent article, “Don't send your child to college without this,” suggests a health care proxy. It’s a pretty simple legal document that gives you the authority to make medical decisions and access their records if they’re disabled. Talk about a critical back-to-school item!

A health care power of attorney is critically important when a child has a health emergency at college.

A HIPAA authorization allows you access to your child’s medical records, which are protected by the Health Insurance Portability and Accountability Act (HIPAA). Your child is an adult, so you can’t call the health center at college and get his or her detailed health information without an authorization.

The health care proxy is more complicated. The one signing it is giving another the authority to make medical decisions for them if they become incapacitated. An agent for health decisions is appointed with the proxy. The proxy covers a broad range of powers, and parents or other trusted individuals who are agents are allowed to speak with doctors, approve tests and examine medical records.

Prior to getting these forms, you should have a serious conversation with your college student on why the documents are important. The proxy talks about some unpleasant decision making—like specifying what treatment or care a person on life support wants and stipulating organ donation and other post-mortem issues. Some of the more detailed proxies have a questionnaire that runs through end-of-life or advanced “health care directive” decisions. As a parent, this is tough language to read, and these are difficult issues to discuss. Nonetheless, they provoke some serious thinking about quality of life in the event of a health emergency.

It’s important to know what the documents can and can’t do: they don’t ensure quality care, and you’ll still need to consult with doctors. Be sure you fully comprehend what these documents mean and how you can modify them.

Speak with your estate planning lawyer and appoint trusted family members or friends to make decisions if you or your spouse/partner can’t. You should also, at the same time, review your own estate plan. If you don’t have a will, powers of attorney or living trust, find out which documents are appropriate for your situation.

Reference: CBS News (September 9, 2016) “Don't send your child to college without this”

Saving the Home with Long-Term Health Care Demands

The largest asset most people have is their family home. If a senior is in a situation where his or her long-term care insurance is exhausted and the other assets are used to pay for care, how does one protect the home from being taken?

Long-term care insurance is important; however, it’s also critical to review and revise your financial and estate plans regularly as your situation changes, according to NJ 101.5’s article “Medicaid and protecting your home.” 10-27-16

Speak with an experienced estate planning or elder care attorney to plan for your individual circumstances. You should also have your will, general power of attorney, advance health care directive or other estate planning documents reviewed or drafted.

As far as how Medicaid works, it has both income and asset limitations that require a recipient to become impoverished to qualify. For Medicaid eligibility, your primary residence is exempt provided you or your spouse live in the house or intend to return to the house to reside. That said, Medicaid will have an automatic lien on any interest in a residence in your name equal to the amount of Medicaid funds you receive. The program will execute on that lien when the home sells or upon death—unless the recipient’s spouse remains an owner of the residence.

To keep people from giving away their property to qualify for Medicaid, there’s a penalty for the transfer within five years of applying for Medicaid. The penalty is calculated by dividing the value of the assets transferred by the state’s Medicaid average monthly cost of a nursing home. The penalty period starts only after an individual enters a nursing home and would otherwise be eligible for Medicaid, not at the time of the transfer. During that time, Medicaid won’t pay for the nursing home. Private funds have to be used.

There are exceptions for undue hardship but these are rare. One exception is for the transfer of a residence to a child who has lived in the home for at least two years before the applicant enters a care facility and who during that period provided the applicant with care and services that enabled that person to live at home. In that situation, the transfer of the house to the child doesn’t result in a penalty. The house won’t be subject to a Medicaid lien.

Similarly, gifts and sales that are less than fair market value within five years of applying for Medicaid are subject to a penalty. But before a transfer is made, there are also income tax considerations which may significantly impact both the transferee and the applicant. If there is no mortgage, another option is a reverse mortgage, which lets you withdraw the equity in the property with the loan being paid back at death or once the property is permanently vacated.

Medicaid is a complex and constantly changing area, so talk with an experienced elder law or Medicaid planning attorney who is current on all the rules that may impact your decisions.

Reference: NJ 101.5 (September 12, 2016) “Medicaid and protecting your home”