TAX TIPS FOR SENIORS

As the tax filing deadline approaches, it is important to review tax matters particularly related to seniors and those engaged in asset protection planning.

Annual Gift Tax Exclusion

The IRS allows an individual to gift up to $14,000 ($28,000 for married couples) to any number of beneficiaries per year without incurring any gift tax.  However, while such gifts are permissible for IRS purposes, they count as asset transfers for Medicaid purposes, resulting in a period of ineligibility for Medicaid benefits.  As such, if you need Medicaid coverage within five years, any such gifts will trigger a waiting period before you can be eligible for Medicaid benefits. 

Outright Gifts vs. Gifts to a Trust

When planning ahead to protect assets, it may be wise to transfer assets to a trust rather than to a child or other family member directly.  Transferring assets to a Grantor Trust may be advantageous as it allows the assets to continue to be taxed at the senior’s tax bracket.  A trust can be drafted so that gifts made to the trust are not “completed gifts” and therefore the grantor would not need to file a gift tax return or pay any gift taxes upon the creation of the trust.  In addition, capital gains taxes can be reduced or even eliminated by transferring certain assets to a trust, such as real property or stock.

Real Estate Tax Exemptions

STAR and Veteran’s exemptions can be maintained despite the transfer of real property to a trust provided the trust document states that you have the right to live in the house for your lifetime (a life estate).  Those exemptions would be lost with an outright transfer of the house.

Retirement Savings and Distributions:

Currently, the principal of an IRA or 401K is exempt for Medicaid purposes provided the asset is in “pay status”, meaning you are receiving monthly distributions.  However, while the IRS requires a minimum distribution when the beneficiary reaches age 70 ½ (the so-called “RMD” or Required Minimum Distribution), Medicaid requires that the distribution be “maximized”.   Roth IRAs are also treated differently by the IRS and Medicaid.  Even though you are not required to take a distribution from a Roth IRA, it must be put it in “pay status” for Medicaid purposes or the principal will not be protected.

Long Term Care Insurance Tax Credits

A portion of your Long-Term Care insurance premium is deductible on your federal income tax return, provided you itemize your deductions.  The deduction amount is age based, increasing with every ten years starting at age 41 up to the maximum deduction amount at age 71 and older.  New York State allows a tax credit of 20% of annual premiums paid (regardless of age).