by Thomas D. Begley, Jr., CELA

Medical Deduction – Client

The IRS permits an income tax deduction for medical expenses. Medical expenses include qualified long-term care services. A taxpayer can claim an itemized deduction for unreimbursed medical expenses to the extent such expenses exceed 10% of adjusted gross income. For individual age 65 and older, the threshold is 7.5% until December 31, 2016. If an individual is institutionalized, an issue may arise as to whether room and board is deductible for medical expenses. The question frequently arises if an individual has resided in an assisted living facility. The answer is that such expenses are deductible if a principle reason for the individual’s institutionalization is to receive medical care. The costs of meals and lodging are necessary incidents to medical care and are deductible.

Asset Transfer

  • Carryover Basis. In determining which assets to transfer and which assets to retain, consideration must be given to the fact that the donee of a gift receives a “carryover basis.” This means that the cost basis of the donee is the same as the cost basis of the donor. Therefore, when the transferred assets are sold, the donee must pay capital gains tax. The best strategy is, usually, to transfer unappreciated assets to the donee, and reserve appreciated assets for the donor. That way, any gain on the sale of the appreciated assets can be offset by deducting the cost of the nursing home from income tax. An alternative strategy is to transfer the appreciated assets to a trust designed to preserve the step-up in basis on death.
  • Step-Up in Basis. Assets forming a part of the estate of a decedent are included in that person’s estate for federal estate tax purposes. The beneficiary of the estate receives a “step-up” in basis with respect to those assets so that the beneficiary’s new basis is the fair market value of the assets as of the date of the death of the decedent.

Retirement Plan

If a person has a retirement plan, such as an IRA or savings plan, the withdrawal of funds from that account is a taxable event. If some period of private payment for long-term care services is required, it makes sense to use the money in the retirement plan for this purpose. The medical deduction for the qualified long-term services can be used to offset the taxable income resulting from the withdrawal from the retirement plan.

Gain on Sale of Home

There is an exclusion from gross income for the sale of a principal residence if the property was owned and used by the taxpayer as the taxpayer’s principal residence for two of the five years preceding the date of the sale. The amount of the gain excluded is $250,000 for a taxpayer filing individually and $500,000 for taxpayers filing jointly. In the case of married couples, the ownership requirement can be met by either spouse, but both spouses must meet the use requirement, and neither spouse can have claimed the exclusion during the two-year period ending on the date of the sale.

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