Planning for the ever-changing Medicaid rules

The Affordable Care Act fills in current gaps in coverage for the poorest Americans by creating a minimum Medicaid income eligibility level across the country. Beginning in January 2014, individuals under 65 years of age with income below 133 percent of the federal poverty level (FPL) will be eligible for Medicaid.

For many of our clients, Medicaid coverage is not an option. Nonetheless, there are still important steps that one can take to guard assets, protect your estate, and prepare for the possibility that you or your spouse will need long-term care: purchase long-term care insurance or self-insure.

Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities. From a tax perspective, premiums paid on long-term care insurance product may be eligible for an income tax deduction and benefits paid from a long-term care contract are generally excluded from income.

Self-insuring fits if your investment assets are sufficient to earmark a portion of your net-worth to cover possible long-term care needs. Before you decide, keep in mind that, once a change of health occurs, insurance may not be available. As always with financial planning, the best time to think about your long-term care strategy is before you need it.

Tax Law Changes Coming, including raised capital gains and dividend tax rates

This month, President Obama released his proposed FY 2014 budget which contains new taxes, limits on deductions, and other changes intended to meet the goal of raising more than $580 billion in revenue.
The most significant of these is the termination of capital gains breaks and qualified dividend treatment, causing them both to be taxed as ordinary income. The Kiplinger Tax Letter suggests taking capital gains before 2015 to lock in the lower rate. However, as always, do not let a tax strategy override a good investment plan.
Here is a summary of other changes that may affect you:
The 28% Limitation:
• Affects married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000.
• Limits the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%.
• Applies to all itemized deduction including charitable contributions, mortgage interest, employer provided health insurance, interest income on state and local bonds, foreign excluded income, tax-exempt interest, retirement contributions and certain above-the-line deductions.
The “Buffet Rule”
• Households with income over $1 million pay at least 30% of their income (after charitable donations) in tax.
• Implements a “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million.
Estate, gift, and generation-skipping transfer (GST) Tax
• Reintroduce rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained.
• This change would take effect in 2018.
• Top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
The Kiplinger Tax Letter anticipates the changes being acted on as early as 2014. On April 23, 2013, Max Baucus (D-MT), the head of the Senate Finance Committee, announced he would retire from the U.S. Senate at the end of his term in 2015. In The Kiplinger Tax Latter, Vol. 88, No. 9, Kiplinger predicts that “he’ll push to make revamping the tax code his legacy.”
You may feel as though you are done with taxes and do not need address them for another year. Resist that urge and schedule a meeting with us so we can review the potential impact of proposed tax changes on your portfolio and investments. We can also discuss the best strategies for saving money on your 2013 and 2014 tax returns.

Planning ideas for the impact of tax law changes in 2013

The only way that the American Taxpayer Relief Act of 2012 provides relief to high income taxpayers is by ending uncertainty. The wait is over and we now know what we can for tax planning; guessing based on the last news from Washington is over.
So, what planning can you do? Start with reviewing all the changes below. Then consider how they apply to you and what you can affect to bear less of a tax burden in this or future years – see the “action” items below in each section.
**Social Security:** The payroll tax holiday ended so that the Social Security tax rates have returned to 6.2% (up from 4.2%) for 2013 wages up to the taxable wage limit of $113,700.
**Action:** //not much to do on this one, because it ends a set maximum each year, unlike the Medicare tax below.//
**Health insurance funding via additional Medicare tax:** The Patient Protection and Affordable Care Act adds a .9% tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. This raises the rate from 1.45%, will rise to 2.35%. However, employers must withhold the Additional Medicare Tax from **all** workers, regardless of marital status, from wages exceeding $200,000.
Action: bunch income in one year (defer/accelerate if you can get below the range – see rates below).
**New Ordinary Income Tax Rate:**
For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with adjusted gross income (AGI) above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
**Action:** //bunch income into one year (defer/accelerate if you can get below the range – especially if you coordinate earned income with net realized gains). The goal is to shift income (and deductions, as discussed below) from one year to another so that the total tax for both years is less. This is easier for self-employed or owners of private companies, as they can shift income within reasonable limits. Also, with large portfolios, there is some ability to put net gains in one year rather than another. As stated below, you can move all dividend and taxable interest paying investments into qualified plans, keeping your asset allocation but lessening the tax burden.//
**New Long-Term Gains and Dividends Tax Rate:**
The tax rates on long-term capital gains and dividends are the same as last year for most taxpayers. However, the rate goes to 20% (up from 15%) for singles with AGI above $400,000, married joint-filing couples with income above $450,000, heads of households with AGI above $425,000, and married individuals who file separate returns with AGI above $225,000. When you add in the new 3.8% Medicare surtax, you get a combined rate of 23.8% on long-term gains and dividends.
**Action:** //Once again, shift net gains into one year and put dividend paying investments in qualified plans.//
**Stealth rate increases:**
**Personal and Dependent Exemption Deduction Phase-Out:** The 2009 phase-out rule for personal and dependent exemption deductions has been restored, so your personal and dependent exemption write-offs are reduced if not even completely eliminated. This phase-out starts at the following AGI thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
**Itemized Deduction Phase-Out:** As above, the 2009 phase-out rule for itemized deductions has been restored, so you can potentially lose up to 80% of your write-offs for mortgage interest, state and local income and property taxes, and charitable contributions if your AGI exceeds the applicable threshold: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, or $150,000 for married individuals who file separate returns. The itemized deductions are reduced by 3% of the amount by which your AGI exceeds the threshold, up to a maximum of 80% of the total affected deductions.
**Medical Expenses:** The floor above which medical expenses can be deducted goes from 7.5% to 10%.
**Action:** //for each of these, try to move deductions into one year, and bunch income to another, so that the total tax for both years is less.//
**Alternative Minimum Tax Help**
The AMT “patch”, which prevented millions having this add-on tax, has higher exemptions and allows various personal tax credits. The new law makes the patch permanent, starting with 2012. The change will keep about 30 million households out of the AMT.
**Action:** you can identify which AMT items affect you and bunch them into one year, to save taxes on another.

//**Gift and Estate Tax Rules Made Permanent**//
For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million (adjusted annually for inflation, making it $5,250,000 for 2013) and a 40% maximum tax rate (up from last year’s 35% rate). Also, you can still leave your unused estate and gift tax exemption to your surviving spouse (the “portable exemption”).
**Action:** //review your assets to see if you can gift any now, even if in a trust for future ownership change, and also check to see if any such gifts help on state estate taxes. You may want to consider a second-to-die policy in an irrevocable trust, if your assets will exceed the credits after gifts.//

**Other changes**
**Action:** //see if any apply, then shift income and deductions so you benefit from them.//
**American Opportunity Higher Education Tax Credit Extended:** The American Opportunity credit, providing up to $2,500 for up to four years of undergraduate education, was extended through 2017.
**Higher Education Tuition Deduction Extended:** While this deduction was set to expire at the end of 2011, the new law restores it for 2012 and 2013, allowing for as much as $4,000 or $2,000 for higher-income folks.
Option to Deduct State and Local Sales Taxes Extended*: This option also expired in 2011 but is restored for 2012 and 2013, giving taxpayers with little or no state income taxes the option to claim an itemized deduction for state and local sales taxes.
**Charitable Donations from IRAs Extended:** This option also expired in 2011 but is restored for 2012 and 2013, allowing IRA owners who had reach age 70½ to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions.
For 2012, you can still act if you do so this month – it will be treated as a December 2012 transaction.
**$250 Deduction for K-12 Educators’ Expenses Extended:** Yet another deduction that expired in 2011 is restored for 2012 and 2013, allowing teachers and other K-12 educators a $250 “above the line deduction” for school-related expenses that they paid.
**$500 Energy-Efficient Home Improvement Credit Extended:** Finally, another credit that expired in 2011 is restored for 2012 and 2013, allowing taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.

The news may be too much, but there are financial matters to review, if you just set aside time

Many people react to the bombardment of news on the economy, the European debt issues, the presidential campaign and legislative gridlock by wanting to shut it all off! That is understandable, but not often the best solution

It is one matter to just not open investment statements; it is a wholly different matter to postpone addressing financial issues

So, while you may not want to review re-balancing of your investments to match your long-term allocation or hear about the dismal returns on bonds, there is more that you can still address

We have suggested a list at: finance health day your own financial planning focus

It is like a “mental health day” but for your personal finances.
After you look at the list, let me know what you think, what you decide to do,
and if we can help you or anyone you know accomplish what is needed now. Thank you,


Same-sex marriages filing jointly with the IRS…

Kiplinger’s Tax Newsletter reports:

Same-sex couples are one step closer to joint filing of their federal returns. An Appeals Court scrapped a law barring them from being treated as married for purposes of federal law, even though they are legally married under state law. This part of the Defense of Marriage Act is unconstitutional (Gill v. OPM, 1st Cir.).
This decision will almost certainly be appealed to the Supreme Court, delaying any final resolution until next year. So until the High Court gives the nod, all same-sex couples remain barred from filing joint income tax returns with IRS.
In the interim, married same-sex couples should file protective refund claims with IRS on Form 1040-X if joint return status would save them tax. The Service will hold the protective claims in abeyance until there’s a final decision in the case.

Same-sex couples also can enroll in long-term-care insurance programs that states offer to their employees. A federal district court struck down a U.S. law
that disqualifies state-maintained long-term-care plans if married same-sex couples or domestic partners are covered (Dragovich v. Treasury Department, D.C. Calif.).

We will continue to track this…..