Posts Tagged ‘tax exemptions’

New Tax-Related Numbers for 2015

JANUARY 12, 2015 VOLUME 22 NUMBER 2

Welcome to 2015! Who thought we’d ever make it?

The Internal Revenue Service did, that’s who. They’ve busily updated numbers for the upcoming year; most of the new numbers have actually been known for a couple months. Once you get used to writing “2015” every time, we have some other new numbers for you to memorize.

Estate tax threshold: The federal estate tax kick-in figure rises to $5.43 million for people who die in 2015. Somewhat confusingly, that is an increase from the $5.34 million figure applicable for deaths in 2014, so don’t assume that the new figure is just a transposition typo when you see it next. Of course, married couples now have a total of twice the new figure (or $10.86 million) to pass without federal estate tax — if they both die in 2015, that is.

Keep in mind that some states still impose an estate tax of their own. They might or might not increase the minimum figure with inflation (most don’t), so if you live in one of those states, or own property in one of those states, you also need to think about the state estate tax limit.

Also remember that the federal $5.43 million figure is reduced for taxable gifts you have made in past years. We’ll talk a little about gift taxes next.

Federal gift tax threshold: You don’t have to pay any federal gift tax until taxable gifts reach a lifetime total of $5.43 million — the same figure as the estate tax threshold. But gifts are even more favorably treated, since the first $14,000 you give to each recipient avoids taxation, filing or any other restriction. That $14,000 figure is the same as last year — it did not increase at all for 2015. Why not? Because, though it is indexed for inflation (and will rise in the next couple years) it only goes up in $1,000 increments. This year’s increase was not enough to cross the $1,000 notch.

You may already know that married people can pretty easily double the $14,000 gift figure. But you might not realize that it’s actually a little harder than most people think. If you and your spouse make a joint gift (if, say, the gift is from a joint account), you have nothing to file and no federal tax effect for the first $28,000 received by a given recipient. But if you write the check on your own separate account, you have to file a gift tax return (and your spouse has to sign it) in order to ignore the excess over your $14,000 gift. Confusing? Talk to your lawyer and accountant about the specifics.

This gives us a chance to mention a common misunderstanding, by the way. Again and again we hear clients say that they are limited to the $14,000 figure for gifts. That is incorrect. If our client says “oh, I knew that: I meant that I can’t give away more than $14,000 without paying a tax,” they are still wrong. It can be a little bit complicated to explain, but here’s how gift-giving works:

  1. If you give away more than $14,000 (twice that for a married couple) to a single recipient, you are required to file a gift tax return.
  2. When you do file your gift tax return, you only pay gift taxes on the amount by which your lifetime gifts exceed the $5.43 million figure (for 2015). In other words, if you have never owned more than $5.43 million in assets, you will have a very, very hard time incurring a federal gift tax, no matter what you do. You will also have a very, very hard time incurring a federal estate tax.
  3. If there is a tax on the gift, it is paid by the giver, not the recipient. Gifts are not deductible from your income tax, and they are not income to the recipient. The only federal tax associated with a gift is the federal gift tax, and it only kicks in after millions of dollars of total gifts.
  4. Married? Both the annual ($14,000) figure and the maximum lifetime gift ($5.43 million) figure are probably doubled.

Bottom line: only people who are both very wealthy and very generous need to worry about actually paying a gift tax. The real worry is about incurring the cost of filing a gift tax return — and that doesn’t kick in until that $14,000/$28,000 figure is reached.

Income tax rates: The basic chart of federal income tax rates is the same as in 2014, but with new figures for the bracket changes. In other words, in 2014 a married couple filing a joint return paid the lowest tax rate (10%) on the first $18,150 of taxable income. For 2015 that first-step threshold increases to $18,450 (a $300 increase). And the top bracket (39.6%) kicks in at a combined income of $464,850 this year, rather than the 2014 figure of $457,600.

Personal exemption and standard deduction: These two separate figures add up to an important principle for low-income taxpayers: if you don’t earn more than the combination of these two figures, you can’t be liable for any federal income tax. The personal exemption reduces your income before we even get to looking at your deductions. The standard deduction is the minimum amount that everyone gets to deduct from income before figuring out their tax liability, even if they don’t itemize deductions.

Both figures increase for 2015, but the increases are small. The personal exemption (you may get more than one, depending on marital status, age and other factors) will increase by a mere $50, to $4,000. For a married couple filing jointly, the standard deduction goes up by another $200. What does that mean for real taxpayers? If you are married filing jointly, and have just two exemptions available (and no dependent children), you don’t have to file at all unless your income exceeds $20,600 ($23,100 if you are both 65 or older).

One other “change” to mention: Last year a special tax opportunity expired. In 2013, if you had to take a minimum distribution from your IRA or 401(k), you could instead direct it to your favorite charity and avoid having to pay tax on it at all. Why was that valuable? Because even if you received the income and then gave it to charity, your charitable deduction wouldn’t cover every dollar of the gift. With this special authority, you really could avoid income tax on the distribution.

But wait! At the eleventh hour (actually, the twelfth hour) Congress brought back the 2013 deduction for 2014 — but not for 2015. So this change helps people who assumed that it would be extended, but doesn’t help anyone who tries to do the same thing in 2015. Unless, of course, Congress re-extends the authority later this year.

Tax Tips for Those Caring for a Child with Special Needs

MARCH 17, 2014 VOLUME 21 NUMBER 11

We last wrote about income tax issues associated with providing care and support for relatives two years ago — just before tax filing time. Since we’re just a month away from tax time 2014, it’s a good time to review and update.

What’s changed since our 2012 newsletter article on income tax issues? A couple things. But first, let’s take another look at the structure of the personal exemption and medical deductions.

You, as an individual taxpayer, get to claim a personal exemption of $3,900 for 2013 (the tax year you’ll be filing for next month). That means that, in addition to other deductions and tax rate calculations, the first $3,900 of income is tax-exempt. If you are married and filing as a couple, each spouse gets a single exemption.

You get another exemption for each person you can claim as a dependent. The easy ones: your minor children who live with you. In fact, you get to claim an exemption for your children until age 19 or (if they are in school) age 24. There are also rules governing when you claim an exemption for your minor (or student) children who do not live with you, but who depend on you for at least half of their support.

What if your child is over age 24 and still living with you? If they live with you at least half of the time, and you provide at least half of their support, you may still be able to claim an adult child as a dependent. In fact, that will be available for a parent, a sibling, a stepchild or foster child, or any descendant of any of those relatives.

There are actually two completely separate sets of rules about when you can claim a child or other relative as a dependent. The two categories are confusing because of their names: “qualifying child” and “qualifying relative.” A “child” for these purposes could be a parent or other relative (why would they make the terms easy to understand?), and a qualifying “relative” can be a child. So it’s hard to figure out exactly which category your child-or-other-relative fits into, but bear with us — there are some simple rules that will cover most of the situations.

Did your child (or other relative) live with you for at least half of 2013? Did you provide at least half of his or her support? If either of those questions can be answered “yes,” then you might well be able to claim them as a dependent and get that extra personal exemption on your tax return. Is your relative permanently and totally disabled? If so, then the exemption is probably available. The central question in most cases: did you provide at least half of your relative’s support?

A couple rules are still important to understand: your dependent can not also be someone else’s dependent — even their own. If they claim a personal exemption on their own tax return, you can not claim another one. You (and they) should figure out which exemption is more valuable as part of your analysis of whether you provide half of their support.

Note that for income tax purposes all sorts of relatives can be a “child.” Illogically, even your parents can qualify under the “qualifying child” exemption. While you’re reading about the tax terms, keep in mind that they might not make plain English-language sense.

In addition to the personal exemption, there are other tax benefits available to someone who is providing support and assistance for a family member with special needs or high medical costs. If you itemize your deductions, you can claim expenses for medical costs. Once again, be careful about assuming the tax code is using plain language — all sorts of things are possibly included as medical expenses.

For instance, if a doctor tells you that you should modify your home by, say, building a therapy pool or installing air conditioning, you might be able to deduct those costs. It may be necessary to figure out how much the improvements increase the value of your home and make appropriate adjustments — though that is not always required. Improvements to enhance accessibility, for instance, do not need to have an enhanced value calculation. This area is tricky: be sure you consult with your attorney or accountant before claiming a deduction for home improvement or modification.

Another medical deduction that is often overlooked: seminars and conventions where you learn more about care of your child with special needs. Do you go to the annual meeting of advocates for your child’s particular disability? If his or her doctor writes a letter indicating that you can learn better caretaking measures there, you may be able to deduct the cost of travel, registration and incidentals incurred at the seminar (but not food and hotel costs). Check with your tax preparer for details applicable to your particular situation.

Does your child benefit from acupuncture, chiropractic treatment or recognized religious healing? The costs may be deductible. Does your child have a guide dog or other assistance animal? Those costs are deductible — including procuring, training, veterinary bills, even food. How about legal bills for your child’s guardianship or other expenses? Sorry, probably not — unless they are necessary to authorize mental health care.

Back to our beginning question: what has changed since our 2012 article? Two important things, at least:

  1. The personal exemption, $3,700 in 2011 (that was the important figure in our 2012 article), is $3,900 for 2013. It will almost certainly go up again for 2014, which will mean a new number if we repeat this information next Spring.
  2. The deduction for medical expenses required your total deductions to be more than 7.5% of your income two years ago. That figure increased for current tax returns (for 2013): you now have to have deductions for more than 10% of your income in order to itemize at all.

What other income tax advice can we offer for taxpayers who take care of a child or other family member with special needs? There are a few things to look out for:

  • Supplemental Security Income (SSI) and VA Disability payments are not treated as income at all. That simplifies tax filing (and reduces taxes) for some special needs trust beneficiaries with income from their trusts that might otherwise be taxable.
  • You may be able to claim a credit for the cost of caretakers for your spouse or dependent if the expenses are necessary to allow you to work. Look at IRS form 2441 and ask your tax preparer for more details. Note that this is not a deduction subject to the 10% threshold — this is a tax credit.
  • If you do claim your child with special needs as a dependent in 2014 (that is, on the return you file next year), you will need to be sure to have him or her covered by health insurance — although Medicare or Medicaid will satisfy this requirement if he or she is on either program.
  • Is there a special needs trust in place? It will have specific tax consequences that you need to discuss with your tax preparer and/or your attorney.

Helping Care for Your Relative Provides Income Tax Benefits

APRIL 9, 2012 VOLUME 19 NUMBER 14
Federal and Arizona state income tax returns are due next week. It’s a good time to review tax deductions for one of the common situations we deal with: in-home (or, for that matter, institutional) caregiving for an infirm family member.

We wrote about an individual case involving long-term care deductions last fall. In that case no returns had been filed, so the taxpayer was playing catch-up — but the U.S. Tax Court agreed that she could deduct the expenses of in-home caregivers. The Court articulated a three-item test to determine whether the taxpayer was a “chronically ill” individual; once she had met any one test, the taxpayer could deduct her medical expenses, including the caregivers.

But what if the caretaking expenses had been paid by someone other than the taxpayer herself? If, for example, she had lived with her adult daughter and the daughter had paid for caretakers to come to the home?

In such a case the daughter should be able to deduct the expenses of care — provided that the patient is a “dependent.” That requires the taxpayer using the deduction to have provided more than half of the patient’s support, and is only available if the patient is a relative OR lived with the taxpayer.

The details about deducting medical expenses for a relative or someone who lives with you are spelled out in IRS Publication 502. Don’t fret about the official-sounding title — it’s actually straightforward and understandable. It also explains exactly what the IRS is looking for when you deduct your own OR a dependent’s medical expenses, and what documentation you will need to provide (or maintain in case you are challenged).

Of course the medical deductions only affect your federal income tax to the extent that they total more than 7.5% of your Adjusted Gross Income (AGI). For many people that limitation is hard to meet. Anyone paying for in-home caregivers, though, is likely to have gotten near to or exceeded the 7.5% threshold.

What about listing a relative (other than your minor children) as a dependent on your own tax returns? Is it possible that the daughter in our earlier scenario might be able to list her mother as a depedent if the mother lives in her home? For that matter, can she list her mother as a dependent if she lives in a nursing home or assisted living facility, but the daughter pays the bill?

The short answer in both cases is “yes.” A parent can be a dependent. That can mean, as described above, that their medical expenses may be listed as deductions on your return — but it also leads to a more direct benefit. If you can list your parent (or another relative) as a dependent, you can get an additional exemption — which reduces your taxable income even before looking for eligible deductions like medical expenses.

Can your parent be your dependent? Yes, but the requirements can be a little complicated. First, they must EITHER be a “qualifying relative” (pretty much any kind of relative you can name, including stepchildren and foster children) OR live with you. In addition, they may not have more than $3,700 (in 2011) of their own income. You must also provide at least half of their support. There are limited exceptions to some of those rules, but that’s the basic test for determining whether you can claim a parent or another person as a dependent. NOTE: these rules are not the same as the ones determining whether you can claim your minor children as dependents — THOSE rules can be much more detailed and complicated.

How can you figure out if you meet all the tests (and their exceptions)? You may not be surprised to learn that the IRS has a Publication to explain that. It is IRS Publication 501, and (just like the earlier Publication we mentioned) it is actually helpful and understandable information.

Can you get a direct credit for the caretaking services you provided for your mother yourself last year? Generally, no — and if you think about it that shouldn’t be too surprising. If you could deduct the value of those services, you would need to claim a similar amount as “income.” But that doesn’t mean that there is no tax benefit to having provided those services. First, they will help you establish that you have provided more than half the support necessary for your parent or family member. Second, you might be eligible to deduct expenses (but not the value of your caregiving) for a dependent. Look at IRS Form 2441 for Child and Dependent Care Expenses; the separate instructions for Form 2441 are (wait for it) straightforward and understandable.

Summing up: taking care of a relative (or someone who lives with you, even if they are not a relative) may be personally and emotionally rewarding. It will not usually be profitable. At least, though, there are some slight tax benefits for those who undertake what is usually a labor of love. Make sure you claim deductions and exemptions you are entitled to by virtue of your caregiving services.

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