IRS Tax Reform Tax Tips for your Elder Parents in 2018

Concerning the recent changes in the tax code, I found some interesting tidbits that you and your elder parents could benefit from, but please review these with your accountant or tax advisor first.

The TCJA

The Tax Cuts and Jobs Act, or the “Tax Reform” act was enacted in December of 2017.  The TCJA is noted for doubling standard deductions, but also changing itemized deductions (as used on Schedule A). With these changes, many who used to itemize their taxes may be better off taking the standard deduction.  These are some changes to itemized deductions for 2018:

Medical and dental costs

For seniors, many times this can be one of the largest parts of their budget, and some of the costs are now deductible for those who itemize including health insurance and Medicare premiums, long-term care insurance premiums, nursing home costs, some prescription drugs, and many other non-covered health care expenses.  However, these deductions are limited (for 2018) to 7.5% of one’s adjusted gross income.

Unfortunately, these deductions will change in 2019 when only medical and dental expenses in excess of 10% of one’s adjusted gross income will be deductible. Of note, in 2019, there will no longer be a penalty for failing to obtain minimum health coverage as before under the Affordable Care Act.

Downsizing

Many retirees have built some equity in their home.  If they decide to downsize, your elderly parents could stand to make a large profit. Fortunately, they may be in luck, provided they have lived in their home for at least two out of the five years previous to the sale of their house. This exemption can be up to $250,000 for single and $500,000 for married taxpayers filing jointly.

Contributions to Charity

  1. Cash: Seniors like to make donations. Cash contributions of up to 60% of their adjusted gross income can be deductible each year as an itemized deduction.  This is up from 50% in 2017.
  2. Property: the fair market value of a donated property may be deductible, but if it has appreciated in its value, however, your parent’s accountant may have to make adjustments. However, if they donate a car, boat, or airplane, your deduction generally is limited to the gross proceeds from its sale by the charitable organization. This rule applies if the claimed value of the donated vehicle is more than $500.

Dependents and Caregivers

The following points come straight from the IRS and are summarized below.

Question

I am a caregiver for my aging parent who lives in my home. May I claim my parent as a dependent on my tax return?

Answer

Generally, to claim your parent as a dependent you must meet the following tests:

  1. You (and your spouse if filing jointly) are not a dependent of another taxpayer.
  2. Your parent, if married, doesn’t file a joint return, unless your parent and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid.
  3. Your parent is a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico.
  4. You paid more than half of your parent’s support for the calendar year.
  5. Your parent’s gross income for the calendar year was less than the $4150.
  6. Your parent isn’t a qualifying child of another taxpayer.
  7. If your parent is your foster parent, they must have lived with you all year as a member of your household.

House related points

Deductions for state and local income, sales and property taxes

Unfortunately, the combined total deduction for all these taxes now has a limit of $10,000, or $5,000 if married filing separately.

Mortgages

Mortgages made on or before Dec. 15, 2017. One can deduct interest on up to $1 million in qualifying debt, or $500,000 for taxpayers who are married filing separately,

After that date, one can deduct only $750,000 in qualifying debt or $375,000 for those who are married filing separately. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

Deduction for home equity interest now modified

  • Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build or substantially improve a main home or second home.
  • For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
  • As under prior law, the loan must be
    • secured by the taxpayer’s main home or second home (known as a qualified residence),
    • not exceed the cost of the home and
    • meet other requirements.

Tax points for Reverse Mortgages

Question

Are the proceeds I receive from a reverse mortgage taxable to me?

Answer

No, reverse mortgage payments aren’t taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.

  • With a reverse mortgage, you retain the title to your home.
  • The reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die.

Question

Can we deduct the interest on a reverse mortgage?

Answer

  • Interest (including original issue discount) accrued on a reverse mortgage isn’t deductible until you actually pay it (usually when you pay off the loan in full).
  • Also, a deduction of interest may be limited because a reverse mortgage generally is subject to the limit on home equity debt, which is not deductible unless the proceeds are used to buy, build, or substantially improve the home that secures the loan. For information on deducting mortgage interest and the debt limit that applies, see Publication 936, Home Mortgage Interest Deduction.

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