The ink on the tax bill is now DRY. And there is reprieve. But, what should you be doing over the next two years? Find out what the tax experts advise…
The ink on the tax bill is now DRY. And there is reprieve. But, what should you be doing over the next two years? Find out what the tax experts advise…
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The real problem in America is not the Government – it is us. Why? We are the ones who want the government to cut the deficit without touching Social Security, Medicare or taxes. Who is kidding who? We need to get real. When commentators speak of American ingenuity and resilience they speak of the capacity to intelligently make decisions even in the face of personal sacrifice (I think!). Neither of our two political parties is being honest about the solutions – but we (the voters) can do better. The politicians have their finger in the wind to navigate their actions. If we the voters would be honest and reach out to our legislators with honest opinions they too would change.
Deficit Reduction Proposals being considered and what it should mean to you. There is much being done by bi-partisan commissions and task forces to come up with realistic solutions to address the very real problem that our nation faces. In the words of one study: We believe that America is facing two huge challenges that can only be surmounted if both political parties work together: recovery from the recession and restraining the soaring federal debt. It goes on to say that this alarming prospect was created by the actions of both political parties over many years, with strong public approval. Read the Commission Report that everyone is talking about.
As you may already know we are in uncertain tax planning times. In 2010 there is no estate tax unless Congress takes steps to finalize some solution. Next year the estate tax exemption is slated to be $1,000,000, the same amount it was in year 2000 with a tax rate that can go up to 55%.
Currently, the Senate is about to introduce a bill seeking a $5,000,000 per person exemption with a maximum estate tax rate of 35%; while thehouse had passed a bill in 2009 with a $3,500,000 exemption amount with a 45% highest tax bracket. In a politically active year it is expected that Congress will do something, but that should not be taken for granted.
For that reason, in my view it would be prudent to plan your estate around the $1M exemption amount. This is done by implicating the use of trusts whereby each of you (married Couples) agree to leave your share of the estate to a credit shelter trust instead to each other. This allows the surviving spouse’s share of the estate to be no more than his or her half of the total community estate, and hopefully less than $1M. This was the planning many of you had undertaken before and that should be continued, but with a twist.
The twist being that the trust should also make provisions to make the assets in the trust invisible to the long term care financing system or Medicaid. This way, if the surviving spouse needs long term care AFTER the death of a spouse, the assets in the trust cannot be required to be spent down to $2,000, thus assuring the surviving spouse that he/she will not be left penniless and some of the assets will end up as an inheritance with your children. The chances are remote that you will need Medicaid, but the provisions are prudent in these uncertain times.
Qualified long-term care insurance policies receive special tax treatment. To be “qualified,” policies must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of “inflation” and “nonforfeiture” protection, although the consumer can choose not to purchase these features.
The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. “Triggers” are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.
Policies purchased before January 1, 1997, are grandfathered and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval. To determine whether a particular policy will be grandfathered, policyholders should check with their insurance broker or with their state’s insurance commission.
Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including “Medigap” insurance premiums), exceed 7.5 percent of the insured’s adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit–your medical expenses do not have to exceed 7.5 percent of your income.
The deductibility of premiums is limited by the age of the taxpayer at the end of the year, as follows (the limits will be adjusted annually with inflation):
|
Age attained before the end of the taxable year |
Amount allowed as a medical expense in |
|
|
40 or under |
2008 |
2009 |
|
$ 310 |
$ 320 |
|
The Taxation of Benefits
Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $280 per day (in 2009), whichever is greater.