Insights from the 2019 Tax Season

As many of my readers know, I am a tax accountant as well as an elder law and estate planning attorney. In fact, many of my legal clients become tax clients to maintain a well-balanced relationship throughout the years. The concept is that by using me to prepare your tax returns, you have access to your attorney at least once a year to discuss relevant changes in your life. Often, clients just drop in to say hello. Other times, there could be something to discuss. Sometimes, it is serious.

For instance, this year, one of my legal clients for whom I’ve been preparing tax returns for several years dropped off her tax papers and asked to spend a few moments with me. She proceeded to tell me about her husband’s cognitive decline and clearly, it was troublesome. Immediately, I was able to put the wheels of elder law planning in motion to ease the family’s distress. They now have access to support services and a plan to protect their assets while paying for the cost of care.

I digress. I thought it would be a good idea to write about some of my experiences this tax season that might be of interest to you.

Approaching the tax season, many people were worried about the impact of the new tax law, especially here in New York where your state and local income tax deduction is now limited to $10,000.00. When I look back at my clientele, most people were unharmed by the new tax law. If you analyze a return that is relatively unchanged from 2017, you will most likely see that your total tax liability decreased. Not by much, but it decreased.

You must then be asking, “Why is my refund less than 2017?” or “Why do I owe more than last year?” This was the surprise for many this tax season. You see, when the tax laws changed last year, the payroll tax withholding tables also changed. By way of example and for illustrative purposes only, because everyone’s tax situation is different, one claiming married “0” for payroll tax purposes may now produce a deduction of $75 per paycheck in federal taxes instead of $100. While it put more money in your pocket on a monthly basis, most, if not all, of my clients didn’t recognize it since it was such a small adjustment. On an annual basis, however, the number became thousands of dollars, which resulted in smaller refunds or larger amounts due. I predict that this is going to have a negative impact on the economy this summer because many people rely on their refunds for vacations, etc. I received a phone call the other day from a client asking for an explanation and at the end of our conversation, she told me she was going to cancel her summer vacation.

Because of the $10,000 state and local income limitation, many clients are no longer itemizing their deductions. A common mistake, however, is that clients stopped providing their itemized deductions to me. While you may no longer need to itemize on a federal tax return, you might still be able to itemize on the New York return. During the tax season, I had the opportunity to review a few returns prepared by other accountants this year, and the New York itemized deductions were ignored simply because the standard deduction was taken on the federal return.

Each tax season, I gain a good number of new clients and in doing so I have the opportunity to review returns for prior years. For those of you who receive government pensions, make sure that your pension income is excluded from your New York return. This mistake saved one of my new clients nearly $3,500.00 this year alone. Also, did you know that if you paid privately for care in a nursing home that you are entitled to a credit for certain taxes paid to the nursing home? The amount is generally 6.8% of the daily rate. This could be a really big number, and if your accountant is unfamiliar with elder law matters, that’s lost money.

I hope this article interests you. One of the things that certainly rings true from this past tax season is that the preparation of tax returns did not become simpler, despite that the first two pages of Form 1040 look a bit simplified. In fact, things became more complex which, in my mind, necessitates the use of a professional.

living will vs. healthcare proxy
Co-Authored by Joanna C. Feldman, Esq.

Long-term care insurance can be a great arrow in one’s quiver of tools when planning for the future.  But long-term care insurance premiums can be expensive, or, possibly more importantly, the coverage can be capped in a variety of ways.

Many long-term care insurance (“LTCI”) policies have a maximum benefit that will be paid on a daily basis.  Some policies have a maximum benefit that will be paid over the course of one’s lifetime.  Some policies have both.  If the maximum benefit(s) will not meet the needs of the insured, the insured may face additional significant fees for their care.

For example: Many nursing homes in and around Westchester County cost between $350.00 and $550.00 per day.  If one’s LTCI covers $200.00 per day, the insured will still owe the difference to the nursing home.  In other instances, the LTCI will be capped at $200,000.00 over the course of one’s lifetime.  $200,000.00 sounds like a lot of money, but when the average cost of a nursing home in and around Westchester County is approximately $14,000.00 per month, it goes very quickly.  The same issues arise with care at home, even though the cost for care at home can be (somewhat) less expensive than care in a nursing home.

Costs for care are only continuing to increase.  Even if coverage under a LTCI policy increases over time (to factor in, for example, inflation or increases in cost of living), those increases may not sufficiently match the rising cost of care.

It’s for these reasons that unless you have an unlimited, iron-clad long-term care insurance policy, it’s still a good idea to meet with an elder law attorney to discuss planning for the future.  For many, planning for Medicaid to cover the costs not covered by the LTCI is a good strategy to try to protect their assets in case they get sick some day and need care.

Estate-planning-assets-for-children
Co-Authored by Joanna C. Feldman, Esq.

The short answer is no, but let’s go further.

Medicaid applications to cover expenses in a nursing home are subject to the five-year look back period.  This means that any gifts, uncompensated transfers, or transfers for less than fair market value made by the applicant within the five years prior to seeking Medicaid benefits will likely result in a penalty period during which Medicaid will not cover the nursing home costs.  The penalty period is calculated by dividing the amount transferred by Medicaid’s rate established for calculating the penalty period.  (The rate varies depending on the location of the facility, and in 2019 averages approximately $12,000.00).

Example:  In 2017, Jill gifted $100,000.00 to her daughter.  Two years later, in 2019, Jill went into a nursing home for long-term care and sought Medicaid benefits.  Using the rate established for 2019, the $100,000.00 gift would result in a penalty period of approximately eight to nine months ($100,000.00 divided by the regional rate).

In such a hypothetical, we are often asked whether the penalty period could be pro-rated because Jill went into the nursing home two years after the gift was made – i.e., only three years of the five-year lookback period remained.  To be more specific, the question is whether the penalty period could be based on 3/5 of the $100,000.00 gift, or $60,000.00, which would result in a shorter penalty period.

The penalty period will not be reduced, or pro-rated, based on the number of years remaining in the five-year lookback period.  The penalty period is based on the total gifts or uncompensated transfers made within the previous five years, regardless of how many years have passed before the applicant seeks Medicaid for care in a nursing home.

The number of older Americans with student loan debt – either theirs or someone else’s — is growing. Sadly, learning how to deal with this debt is now a fact of life for many seniors heading into retirement.

According to a study by the Consumer Financial Protection Bureau, the number of older borrowers increased by at least 20 percent between 2012 and 2017. Some of these borrowers were borrowing for themselves, but the majority was borrowing for others. The study found that 73 percent of student loan borrowers age 60 and older borrowed for a child’s or grandchild’s education.

Before you co-sign a student loan for a child or grandchild, you need to understand your obligations. The co-signer not only vouches for the loan recipient's ability to pay back the loan, but is also personally responsible for repaying the loan if the recipient cannot pay. Because of this, you need to carefully consider the risk before taking on this responsibility. In some circumstances, it is possible to obtain a co-signer release from a loan after the loan recipient has made a few on-time payments. If you are a co-signer on a loan that has not defaulted, check with the lender about getting a release. You can also ask the lender for payment information to make sure the borrower is keeping up with the payments. 

If the borrower defaulted and you are obliged to pay the loan back or you are the borrower yourself, you will need to manage your finances. Having to pay back student loan debt can lead to working longer, fewer retirement savings, delayed health care, and credit issues, among other things. If you are struggling to make payments, you can request a new repayment plan that has lower monthly payments. With a federal student loan, you have the option to make payments based on your income. To request an “income-driven repayment plan,” go to: https://studentloans.gov/myDirectLoan/index.action

Defaulting on a student loan may affect your Social Security benefits. If you have a private student loan, a debt collector cannot garnish your Social Security benefits to pay back the loan. In the case of federal student loans, the government can take 15 percent of your Social Security check as long as the remaining balance doesn't drop below $750. There is no statute of limitations on student loan debt, so it doesn't matter how long ago the debt occurred. If you do default on a federal loan, contact the U.S. Department of Education right away to see if you can arrange a new repayment plan. 

If you die still owing debt on a federal student loan, the debt will be discharged and your spouse or other heirs will not have to repay the loan. If you have a private student loan, whether your spouse or estate will be liable to pay back the debt will depend on the individual loan. You should check with your lender to find out the discharge policies. Depending on the loan, the lender may try to collect from the estate or any co-signers. In a community property state (where all assets acquired during a marriage are considered owned by both spouses equally), the spouse may be liable for the debt (some community property states have exceptions for student loan debt). 

For tips from the Consumer Financial Protection Bureau to help navigate problems with student loans, click here.

Donor-advised funds are a growing trend in giving that may get more popular due to the new tax law. These funds allow you to donate money, receive a charitable tax deduction, and continue to grow the money until you are ready to distribute it to a charity or charities of your choice. 

A donor-advised fund is established through a charity or nonprofit. The way the fund works is that you donate assets (it can be cash, stocks, or real estate) to the fund. The gift is irrevocable – the nonprofit controls the assets and you cannot get the assets back. You may then take an immediate tax deduction for the gift to the fund. Once the fund is established, you can tell the fund where to donate the money, and when. 

These funds are becoming more popular in part because the new tax law enacted in 2017 doubled the standard deduction to $12,000 for individuals and $24,000 for couples. This means that if your charitable contributions along with any other itemized deductions are less than $12,000 a year, the standard deduction will lower your tax bill more than itemizing your deductions. For most people, the standard deduction will be the better option and they will get no deduction for their charitable contributions. 

A donor-advised fund allows you to contribute several years' worth of charitable donations to the fund at once and receive the tax benefit immediately, making it more likely that itemizing would be more advantageous than taking the standard deduction. 

There are different types of donor-advised funds. Some are spinoffs of large financial investment firms like Fidelity and Schwab. Others may be smaller community funds. Some universities and faith-based organizations also have funds. Each fund has its own rules on how the money is distributed. There may be limits on how much you can donate each year or a requirement that you donate a certain amount. Some funds are single-issue funds that may require that at least some of the donations go to a particular charity or cause. Each fund also has its own rules on whether the fund can be passed down to heirs. 

Before deciding to give to a donor-advised fund, you should investigate the fund's rules, fees, and how established the fund is. It is best to consult with your financial advisor before making any major donations. 

For more information about donor-advised funds from the Chronicle of Philanthropy, click here.

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The information presented at this site should not be construed to be formal legal advice nor the formation of an attorney/client relationship.

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