The costs associated with providing home health care for aging parents can be a significant drain on savings. Proactive tax planning can help ensure a family takes full advantage the potential medical deduction.
Proactive planning is best accomplished by preparing a mock tax return (using the prior year return as a guide) that considers the following:
1. Start by quantifying the potentially deductible medical expenses. Keep in mind that all expenses are not deductible. Qualified medical expenses must exceed 10% of adjusted gross income (AGI) to be included as an itemized deduction on Schedule A. In addition, total itemized deductions on Schedule A will need to exceed the standard deduction to be advantageous.
2. Determine if any tax liability will be due. If taxes will be due, evaluate the rate and expectations for the next tax year to determine if it may be advantageous to accelerate deductions. This is often accomplished by pre-paying property taxes or making additional charitable gifts. If taxable income is zero because deductions exceed income, consider options to increase income in Step #3.
3. If no tax liability is projected, consider larger IRA distributions. IRA distributions will increase taxable income but if deductions are expected to offset the income, it is advantageous to take the distribution when it is tax-free. This strategy can be especially beneficial when considering that the beneficiaries of the IRA will ultimately pay taxes on any remaining savings at their applicable tax rate. If cash is not needed consider a parallel strategy of converting some of the IRA to a Roth IRA. Ideally the Roth IRA is preserved for the intended beneficiaries and any appreciation is tax-free. Note that with either strategy an IRA distribution will increase the adjusted gross income (AGI). If deductions will be itemized be sure to recalculate the expected medical deduction in Step #1 given the increased AGI.
Proactive tax planning can be time consuming but a cursory review of either the prior year return or the current year medical expenses will likely determine whether it will be advantageous to accelerate deductions (Step #2) or income (Step #3). Accelerating deductions is especially advantageous when the expenses either won’t be deductible in a future year or will not help to future reduce tax liabilities. Accelerating income can be even more beneficial. Funds converted from an IRA to a Roth IRA may help beneficiaries avoid tax upon ultimate withdraw and shelter the savings from taxation in the meantime, potentially for multiple decades.
The articles presented on this blog are general in nature and should not be assumed to be applicable to your situation. In addition, tax law changes daily and the articles on this blog are not updated to reflect these changes. Anyone receiving any part of the information on this blog should not rely on or act or refrain from acting on the basis of any matter or information contained in this blog without seeking appropriate tax, legal or other professional advice. The transmission and receipt of information contained on this blog does not form or constitute a client relationship. Nothing in this blog constitutes legal advice. Opinions rendered by tax professionals are not authority. You agree to hold Brendan Willmann, EA, forever harmless from any liability for your use or failure to use the information, advice, referrals, or suggestions provided by this blog at any time.