Every year as tax time approaches, we dig for receipts, organize our bills and try to get the most out of our tax returns.While these items are important, many seniors
don’t take as much time to think about the looming tax issues down the road: estate taxes, gift taxes and the tax impact of healthcare costs. Families benefit when all of their tax issues are part of the same discussion and when multiple genera- tions work together with experts to find the best strategy. The good news is, like many of the more familiar annual taxes we pay, end-of-life taxes can be avoided or minimized with the right planning. Here are some of the areas seniors should be aware of, which affect both types of taxes.
The estate tax, often called the death tax, can be a significant burden for families that don’t plan ahead, and changes at the federal and state level make planning even more critical. At the end of 2012, the Ohio estate tax is currently set to expire and the federal threshold for estate tax eligibility is scheduled to drop from estates worth more than $5 million down to $1 million. Assuming these changes occur as planned, lowering the threshold will impact signifi- cantly more families. For now, the Ohio estate tax applies to those estates valued at $338,333 and up, and is assessed by calculating approximately 7% of property/asset value. The maximum federal estate tax is currently set at 35% of property/asset value.
Tips to reduce your family’s exposure/obligation:
• Stay informed—the Ohio estate tax, while currently set to expire, might ultimately make a comeback as its revenues contribute significantly to municipal budgets. Further, Congress may move the federal threshold for 2013 back closer to $5 million before year’s end;
• Minimize your federal estate tax obligation by gifting up to $5 million to family members between now and the end of 2012 (see details in the next section);
• Create a trust to manage the distribution of assets and maximize tax exemptions; and
• Ensure that your heirs have the ability to pay within nine months of death or they may incur significant penalties.
Gift tax is the federal tax assessed on the value of property gifted from one person to another (excluding your spouse) above the annual exclusion. There is a widespread perception that there is an upper limit (commonly thought to be $10,000) on how much you can give annually as a gift without incur- ring federal gift tax. The reality is more complex, but more for- giving: currently, you are not obligated to pay a gift tax unless the sum of all of your lifetime gifts totals more than $5 million, but next year it will go down to $1 million.
The annual exclusion amount, below which there is no need to file a tax form, is currently $13,000 per person per year. This means that, in effect, you can give up to $13,000 annually to as many people as you wish without any tax-related paperwork.
Tips to reduce your exposure/obligation:
• In the State of Ohio, any gifts made three years prior to death are pulled back into the estate so that any applicable estate tax must still be paid on those gifts. After those three years are up, the tax no longer applies;
• Exercise caution if you plan to apply for government benefits in a nursing home situation as gifts can potentially disqualify you from receiving government-sponsored nursing home benefits; and
• Whenever making gifts to others including family mem- bers, make sure that you are very conscious of the effects
of placing your assets into someone else’s name. Remember, when doing so you lose control and subject the assets to their potential liabilities.
Medical Expenses/In-Home Healthcare
If you have significant medical expenses, including those related to specialized in-home medical care, make sure that they are deducted from your annual income taxes. There are also ways to protect your family from bearing the long-term cost of this care, or having it eat into your estate:
Tips to reduce your exposure/obligation:
• Remember that you can deduct medical expenses– allowable expenses must exceed 7.5 percent of adjusted gross income before any benefit kicks in;
• Deductions go well beyond medications and insurance bills; items such as specialized medical equipment like wheel- chairs, dentures, premiums for long-term care insurance and many other items;
• Proceed carefully when hiring in-home healthcare assistance: direct hires (as opposed to employees contracted through a home healthcare specialist or similar agency)
may incur additional tax reporting and payment obligations through the employer (i.e. you or your family); and
• Check with your CPA to determine the specific medical deductions that apply to your situation.
The bottom line is that the best strategy to reduce your end-of-life taxes is to plan ahead to ensure that your financial and legal strategies are working in concert thereby reducing your exposure.While the tips above are a great way to
help you get started, it is always a good idea to consult
an experienced and trusted attorney who dedicates their practice to elder law to ensure that you are doing everything possible under the law to make certain that your tax burden is minimized, your assets are preserved and your family