Retirement: Assisted Living Tax Issues Insert tax topic notes in this portion of the slides. Presenter Date

About Me Name Years experience Certifications H&R Block tax professionals must complete at least 15 hours of continuing education annually and are required to train on systems, policies and procedures up to an additional 35 hours of education annually.

Did you know that? H&R Block served more than 24.1 million taxpayers in 2014 We have been preparing America’s taxes since 1955. 2015 marks H&R Block’s 60th tax season There is a retail office within 5 miles of most Americans “We look at your life through tax… and find ways to help.”

General rule on deductible expenses Senior care expenses Deductible medical expenses General rule on deductible expenses Senior care expenses Nondeductible expenses

Schedule A (itemized deductions) 10% threshold (7.5% for 65 and older) How to Deduct Medical Expenses Schedule A (itemized deductions) 10% threshold (7.5% for 65 and older) Cannot be reimbursed or reimbursable

Whose Expenses are Deductible? Taxpayer/spouse/dependent Claiming parent as a dependent Citizenship test Joint return test Gross income test Support test Multiple support agreements May be able to claim parent’s expenses if dependency met except for gross income or joint return test.

Income used for support Social security benefits The Parent’s Income- Special Issues Income used for support Social security benefits Long-term care benefits

Head of Household Filing Status Single taxpayers who can claim parent as dependent More favorable filing status (lowers taxable income and tax) May be eligible even if parent lives in assisted living

Estate/trust planning (including review of beneficiaries) Other Reminders Retirement accounts Estate/trust planning (including review of beneficiaries) Long-term planning

- $15,800 Personal exemptions ($3,950 × 4) Scenario #1 $350,000 Income/AGI - $15,800 Personal exemptions ($3,950 × 4) - $100,000 Itemized deductions* $234,200 Taxable income $53,191 Federal tax *$50,000 medical + $17,000 state taxes + $25,000 mortgage interest + $8,000 charitable Taxpayers Dan and Caroline McCoy file a joint return and claim their 16-year old son Louis as a dependent. Dan’s mother, Beth McCoy, has been living on her own. However, because of a variety of medical issues, her physician strongly recommends that she move to a long-term care facility. The elder Mrs. McCoy’s doctor has certified that she is chronically ill and requires considerable assistance with many aspects of daily living, including bathing, dressing, and getting in and out of her wheelchair. Dan’s and Caroline’s joint income is $350,000. Their itemized deductions consist of state/local income, real property, and personal property taxes ($17,000), mortgage interest ($25,000), charitable contributions ($8,000), and medical expenses ($15,000). The cost of long-term care would be approximately $70,000. Beth has few financial resources and no long-term care insurance. Dan and other siblings have provided her with financial and other assistance, but nobody has claimed her as a dependent (until now)! Dan’s and Caroline’s tax advisor has explained the dependency support requirement to them and pointed out to them that if they pay Beth’s long-term care expenses, they would be providing more than half of her support. The result is that Dan and Caroline reduce their taxable income by over $53,000 and their taxes by over $17,000. They get an extra personal exemption for Beth (worth $3,950 in 2014). Another bonus: their own $15,000 medical expenses, which provided no tax benefit to them before, now get added to the $70,000 deduction for Beth’s expenses. The deductible medical expense is $50,000 ($85,000 – (($350,000 × 10%)). The net cost of Beth’s long-term care is about $53,000 ($70,000 - $17,000) – they are getting almost 25% of the cost back in tax savings. Note to presenter: The actual tax for MFJ, 3 exemptions, no medical deduction, and all other facts the same is $70,994 and actual tax saving is $17,803.

- $11,850 Personal exemptions ($3,950 × 4) Scenario #2 $120,000 Income/AGI - $11,850 Personal exemptions ($3,950 × 4) - $48,500 Itemized deductions* $59,650 Taxable income $7,410 Federal tax * $28,000 medical + $10,000 state taxes + $8,000 mortgage interest + $2,500 charitable Taxpayers Sam and Melinda Taylor file a joint tax return claiming Sam’s mother, Patricia Taylor, as a dependent. Patricia’s income consists of social security benefits and a small (about $50/month) pension. She does not have a tax filing requirement. Patricia has mild/moderate dementia and moved to an assisted living/dementia care facility late last year. The approximate yearly cost is $72,000. Patricia has a qualified long-term care contract that pays $20,000 of this cost and her social security and pension cover another $12,000. Sam and Melinda cover the remaining $40,000 cost. Sam and Melinda have an income of $120,000. Their itemized deductions consist of state/local income, real property, and personal property taxes ($10,000), mortgage interest ($8,000), charitable contributions ($2,500), and the deductible cost of Patricia’s care. Sam and Melinda’s tax liability is $7,410. Of course $40,000 is a heavy expense to bear. However, because they can claim the extra personal exemption (worth $3,950 in 2014) for Patricia and deduct $28,000 ($40,000 – (($120,000 × 10%)) for her medical care, they are able to lower their taxable income by $31,950 and save over $7,200 in federal taxes. Thus their net cost is about $32,800, ($40,000 - $7,200) – they are getting about 18% of the cost back in tax savings. Note to presenter: The actual tax for MFJ, 2 exemptions, no medical deduction, and all other facts the same is $14,613 and actual tax saving is $7,203.

- $7,900 Personal exemptions ($3,950 × 4) Scenario #3 $90,000 Income/AGI - $7,900 Personal exemptions ($3,950 × 4) - $48,700 Itemized deductions* $33,400 Taxable income $4,363 Federal tax * $31,000 medical + $9,200 state taxes + $7,000 mortgage interest + $1,500 charitable Sarah Brown is single. Her mother, Laura Brown (a widow) had been living on her own. Although Laura was mentally alert and did not need round-the-clock care, she required considerable assistance with bathing, dressing, getting up and down from chairs, the bed, etc. not to mention a growing and confusing array of daily medications to deal with. So, they made the decision for Laura to move to an assisted living facility. Laura’s income consists of social security and a small amount of interest. She does not have a tax return filing requirement. The yearly cost of the facility is $65,000. Laura has a long-term care policy that pays $20,000 toward the cost. Her social security and interest pay another $8,000 of the cost. Sarah pays the remaining $37,000 of the premium. She also pays for clothing and other sundry expenses for Laura. She was very pleased to learn from her tax professional that she is able to claim Laura as a dependent and use the head of household filing status. Sarah’s income is $90,000 and she itemizes deductions. Her itemized deductions consist of state/local income, real property, and personal property taxes ($9,200), mortgage interest ($7,000), charitable contributions ($1,500), medical expenses ($40,000 – her own $3,000 plus the deductible cost of Laura’s care of $37,000). Sarah’s tax liability is $4,363. She is able to claim the extra ($3,950) personal exemption for Laura, use the more favorable head of household filing status, and deduct $31,000 (($37,000+ $3000) – (($90,000 × 10%)) for the medical care of herself and Laura. Thus she is able to lower her taxable income by nearly $35,000 and save over $8,581 in federal taxes. Because her net cost is $31,419 ($40,000 - $8,581) – she is getting about 22% of her cost back in tax savings. Note to presenter: The actual tax liability for a single filer with one exemption and all other facts the same is $12,944 and actual tax saving is $8581. Another point: Sarah was able to claim a deduction for her own $3,000 of medical expenses because, added to her expenses for Laura, she was well over the 10% hurdle.

$3,950 Personal exemptions ($3,950 × 4) $57,725 Itemized deductions* Scenario #4 $97,000 Income/AGI $3,950 Personal exemptions ($3,950 × 4) $57,725 Itemized deductions* $35,325 Taxable income $4,845 Federal tax * $57,725 deductible medical Taxpayer Ben Burnett is a widower. His yearly income consists $80,000 in interest and pension income, as well as $20,000 of social security benefits ($17,000 of which is taxable, based on his total income). His total income is $97,000. Because of increasing medical problems and assistance needed, Ben made the decision (with his doctor’s recommendation) to move from an independent living apartment to an assisted living facility. The approximate yearly cost is $65,000. Ben had been using the standard deduction ($7,750 for single taxpayers age 65 or older). The $65,000 long-term care expense is deductible as an itemized deduction. Ben’s tax liability is $4,845. He can deduct $57,725 ($65,000 – (($97,000 × 7.5%)) of the long-term care expense. He lowers his taxable income by over $57,000 and his federal taxes by over $12,000. Thus his net cost is about $53,000 ($65,000 - $12,000) – he is getting over 18% of the cost back in tax savings. Note to presenter: The actual tax for Single, 1 exemption, standard deduction for 65+, and all other facts the same is $17,181 and actual tax saving is $12,336. In all likelihood, other amounts (small charitable contributions, other medical expenses, state taxes) that were below the standard deduction before this now can be added to the long-term care deduction and decrease taxes even more.

Questions?