Article Highlights

Estate and Gift Tax Lifetime Exclusion Amount
Gifting While the LEA is at its Current Level
Annual Gift Tax Exclusion
Inherited Basis
Capital Gains Rates
Tax Planning

The Tax Cuts and Jobs Act (TCJA, often referred to as tax reform) generally became effective in 2018 and increased the federal estate and gift tax lifetime exclusion amount (LEA) from $5 million per person to $10 million per person. On top of that, the exclusion is annually adjusted for inflation, meaning the LEA for 2020 has been inflation-adjusted to $11.58 million. However, the provisions of TCJA are temporary, and unless Congress makes changes, the exclusion will revert to the pre-TCJA amount of $5 million (estimated to be $6.2 million when adjusted for inflation) beginning in 2026. However, the elections in November, depending on which party comes out on top, could change all that, since several of the current Democratic candidates propose to reduce the LEA, with $3.5 million the amount most often mentioned. Recently, there has also been concern among financial experts and estate attorneys related to what will happen if large gifts are made while the LEA is at the higher lifetime exclusion amount and then the exclusion amount reverts to the pre-TCJA amount. Would those larger gifts become taxable in excess of the lower LEA?
Example: In 2020, Joe makes a gift of $8 million to his son. Since the LEA is $11.58 million, Joe would not incur any gift tax liability in 2020; but what will happen in 2026 when the LEA drops back to $5 million (adjusted for inflation)? Will the difference between the $8 million gift made in 2020 and the lower LEA in 2026 trigger a gift tax? How will Joe’s estate tax exemption-generally the amount of his LEA that hasn’t been used to offset taxable gifts during his lifetime-be impacted if he dies after 2025? Example: In 2020, Joe makes a gift of $8 million to his son. Since the LEA is $11.58 million, Joe would not incur any gift tax liability in 2020; but what will happen in 2026 when the LEA drops back to $5 million (adjusted for inflation)? Will the difference between the $8 million gift made in 2020 and the lower LEA in 2026 trigger a gift tax? How will Joe’s estate tax exemption-generally the amount of his LEA that hasn’t been used to offset taxable gifts during his lifetime-be impacted if he dies after 2025?
Luckily, the final regulations issued by the IRS provide a special rule that allows an estate to compute its estate tax using the higher of the LEA applicable to gifts made during life or the LEA applicable on the date of death. Thus, making large gifts now won’t harm estates after 2025, something wealthier taxpayers should take into their planning considerations. Gifting While the LEA Is at Its Current Level – So, it may be appropriate for those with larger estates to consider taking advantage of the current larger LEA and make larger gifts before the LEA reverts to lower levels or Congress changes it to a lower amount. Of course, when considering such gifts, one would need to be sure the remaining estate would sustain one’s current lifestyle adequately without undue risk. It is also important that the gifted assets, if not cash, will hold their value so the LEA is not used up on gifting assets that might subsequently decline in value. Another consideration in gifting assets is that the gift recipient, referred to in tax lingo as the donee, assumes the tax basis of the donor, so the gift essentially passes to the donee with any tax liability of the donor, even though the current gift amount is determined using the current fair market value of the asset. Annual Gift Tax Exception – Gifting reduces an estate and is the reason there is a gift tax—to prevent estates from being gifted away prior to death and depriving the government of estate taxes. In addition to the LEA, there is an annual gift tax exclusion that allows a donor to gift up to as much as $15,000 (inflation adjusted amount for 2020) per year to as many recipients (related or not) as they would like. For example, a parent with four children could give each of them $15,000 without any gift tax ramification. A married couple could give each child $30,000 per year. If the children were married, the parents could gift the couple up to $60,000 per year. In addition to the $15,000 annual exclusion, there are two situations in which gifts don’t count toward the annual exclusion amount: when a donor makes payments directly to an educational institution for the tuition of a donee (does not include other education expenses) or payments are made directly to any person or entity providing medical care for the donee. Inherited Basis – Another current aspect of estate planning is that inherited assets have their tax basis adjusted to the fair market value of the asset at the time of the decedent’s death. This is commonly referred to as a “step up in basis.” As a result, estate beneficiaries will incur little or no taxable profit if the inherited property is immediately sold. However, a number of presidential candidates are proposing to do away with “step up in basis,” adding another variable to the long-term estate planning issues. Capital Gains Rates – Currently, inherited assets are immediately, upon inheritance, treated as being held long-term and benefit from the special lower tax rates for long-term capital gains. Virtually all of the Democratic candidates have indicated they would like to see the special long-term capital gains rates eliminated and all gains subject to the ordinary tax rates that apply to other types of income, such as wages. Tax Planning – All these possible variations, including a probable substantial change in the LEA in the future, the possible elimination of “step up in basis” for inherited assets, and potential abolishment of capital gains rates, make it very difficult to develop estate plans with any long-term certainty. Those with substantial estates should follow future developments and adjust their estate planning accordingly. If you have questions related to estate tax issues, please give this office a call.

Article Highlights:

Home Care Workers
Employee Payroll
W-2
1099-NEC
Medical Deduction
Equipment and Supplies
Nursing Services
Home Modifications

Because people are living longer now than ever before, many individuals are serving as care providers for loved ones (such as parents or spouses) who cannot live independently. It can be tough enough caring for a disabled or elderly person at home, but you also have to be aware of the tax implications, which can be both beneficial and detrimental. This article explores the various tax issues related to caring for an individual at home. Home Care Workers – Quite often, caring for an elderly or disabled loved one at home requires obtaining assistance so you can work, sleep, or simply have a break from providing the needed care. This is especially true when caring for someone with Alzheimer’s who has to be watched closely so they don’t wander off or someone on hospice care who needs around-the-clock care. However, if you hire someone to help you provide care in your home, neither the federal nor state tax authorities are very helpful. In fact, they make it difficult and require home workers to be treated as employees. When the worker is your employee, your liability includes both withholding and paying payroll taxes as well as issuing a W-2 after the close of the year. One alternative is to contract with an agency to use their employees to provide the needed care and handle all the payroll obligations, but it will be quite a bit more expensive. Sure, you are thinking it is a lot easier to pay your household worker in cash so as to avoid federal and state payroll taxes and all the paperwork and hassle that goes with them. Plus, your domestic worker will likely be fully cooperative with a cash deal because he or she can also avoid paying taxes on the income you give them under the table. However, if the IRS or your state employment department finds out about these payments, the result could be very unpleasant and costly for you. Not everyone who performs services in or around your home is classified as an employee. For instance, a plumber or electrician who makes repairs in your home will generally be a licensed contractor; the government does not classify contractors as employees. On the other hand, the IRS has conclusively ruled that nannies, housekeepers, senior caregivers, and various other domestic workers are employees of the people for whom they work. It makes no difference if you have a written contract with the employee; similarly, the number of hours worked and the amount paid do not matter. You are probably thinking, “Wait a minute – everyone I know with household help pays in cash, and none of them has paid payroll taxes or issued a W-2 for a household employee.” However, just because they’ve chosen to violate the law doesn’t mean you should. Also, keep in mind that if a worker gets injured on your property or you dismiss the worker under less-than-amicable circumstances, it’s a pretty sure bet that your household employee will be the first one to throw you under the bus by reporting you to the state labor board or by filing for unemployment compensation. Some individuals try to circumvent the payroll issue by treating a household employee as an independent contractor and incorrectly issue the household employee a Form 1099-NEC (or Form 1099-MISC prior to 2020). Medical Expense Deduction – On the bright side, home care can be a medical deduction, to the extent that the expenses exceed 7½ percent of your adjusted gross income (AGI) for 2020 (increases to 10% after 2020) and you itemize deductions rather than claiming the standard deduction. Deductible expenses include: Disabled Dependent Care Expenses – Some disabled dependent care expenses may qualify as medical expenses or work-related expenses for the purposes of taking a credit for child and dependent care. The expenses can be applied either way as long as the same expenses are not used to claim both a credit and a medical expense deduction. Equipment and Supplies – Although there is a prohibition against deducting the cost of over-the-counter medications, that prohibition does not apply to such items as crutches, bandages, diapers, medical beds, and diagnostic devices (e.g., blood sugar kits used by diabetics). The costs of such equipment and supplies are deductible if they otherwise meet the general requirement of being used for the diagnosis, cure, mitigation, treatment, or prevention of disease. Nursing Services – Wages and other amounts paid for in-home nursing services can be included in medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for a patient’s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services. Part of the amounts paid for an attendant’s meals are also included in medical expenses. If additional amounts for household upkeep were paid because of the attendant, include the extra amounts with the medical expenses. This includes extra utilities or rent paid; e.g., because a larger apartment was needed to provide space for the attendant. Home Modifications – Generally, the costs of home improvements are not deductible except to offset home gain when the home is sold. However, a medical expense deduction may be claimed when the primary purpose of the home modification is for a medical reason. The tax law says that deductible medical expenses are those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.” So, if you are making the modification because you, your spouse, or a dependent has a medical need, then the modification expense may be deductible as a medical expense, but only to the extent that it exceeds any resulting increase in the property’s value. For example, a doctor recommends that a taxpayer with severe arthritis have daily hydrotherapy. The taxpayer has a hot tub installed at a cost of $21,000. A certified home appraiser determined the hot tub addition increased the home’s value by $20,000. The taxpayer’s medical deduction for installing the hot tub will only be $1,000. The other $20,000 of expenses will increase the home’s basis, meaning that it will add to the home’s cost and will offset the sales price when the home is sold. While the tax rules don’t require a prescription from a doctor for most medically related home modifications, the taxpayer, if questioned by the IRS, needs to be able to demonstrate how the expenditure is related to his or her medical care or that of a spouse or dependent; having a letter from the individual’s doctor that explains the type of modifications that would be medically beneficial would help to prove a medical need. Not all improvements result in an increased home value. In fact, some, such as lowering cabinets for an occupant confined to a wheelchair, could actually decrease the home’s resale value. The IRS has identified certain improvements as not usually increasing a home’s value and for which the cost can be included in full as a medical expense. These improvements include, but are not limited to, the following items:

Constructing entrance or exit ramps for the home;
Widening doorways at entrances or exits to the home;
Widening or otherwise modifying hallways and interior doorways;
Installing railings, support bars, or other modifications;
Lowering or modifying kitchen cabinets and equipment;
Moving or modifying electrical outlets and fixtures;
Installing porch lifts and other forms of lifts (but generally not elevators);
Modifying fire alarms, smoke detectors, and other warning systems;
Modifying stairways;
Adding handrails or grab bars anywhere;
Modifying hardware on doors;
Modifying areas in front of entrance and exit doorways; and
Grading the ground to provide access to the residence.

Only reasonable costs to accommodate a home for a disabled condition or elderly individual are considered medical care costs. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses (but may be additions to the home’s tax basis). Please give this office a call if you have questions or need to establish a household employee payroll account.

Tax law changes allow either kiddie tax computation to be used in 2018 and 2019, allowing the method that provides the lowest tax to be used. This opens up the possible opportunity to amend the 2018 return for a refund. A child’s return can be tricky to prepare. Watch the video for more details. Please call this office for your child’s tax-preparation needs.
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Article Highlights:

Non-business deductions
AMT
Tax bracket
Above-the-line deductions
Business deductions

Taxpayers frequently ask what benefit is derived from a tax deduction. Unfortunately, there is no straightforward answer. The reason the benefit cannot be determined simply is because some deductions are above-the-line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending on his or her particular situation. For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 24% tax bracket, a $1,000 deduction would save you $240 in taxes. However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings. Some deductions, such as IRA and self-employed retirement plan contributions, alimony, student loan interest, etc., are adjustments to income or what we call above-the-line deductions. These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived. In addition, the medical deductions are reduced by 10% of your AGI (income). Under the rules of the 2017 tax reform, the state and local taxes deduction is limited to $10,000, no deduction is allowed for home equity interest, and deductions such as employee business expenses and investment expenses aren’t deductible at all in years 2018 through 2025. Taxpayers subject to the alternative minimum tax are not able to deduct any taxes. The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions but aren’t deductible in years 2018-2025, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax. For 2019, the self-employment tax rate is 12.4% of the first $132,900 of income subject to SE tax plus 2.9% for the Medicare tax with no cap. In addition, for high-income taxpayers, an additional 0.9% Medicare tax may apply. For self-employed businesses with less than $132,900 of net income, the SE tax rate is 15.3%. Thus, for small businesses with profits of less than $132,900, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $786 and more when the taxpayer’s state income tax bracket is included. If you are planning an expenditure and expect the tax deduction to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate.