Fong Law Group

IRS Issues Long-Term Care Premium Deductibility Limits for 2022, and They Look Pretty Familiar

The Internal Revenue Service (IRS) has announced the amounts taxpayers of different ages can deduct from their 2022 income as a result of buying long-term care insurance, and the figures are almost the same as in 2021.

Many types of medical expenses are deductible from your taxes. To claim the deduction, your total unreimbursed medical expenses (which can include premiums for “qualified” long-term care insurance policies), have to be more than 7.5 percent of your adjusted gross income in 2022.

As long as the long-term care insurance policy is “qualified” (see below), these premiums -- what the policyholder pays the insurance company to keep the policy in force -- are deductible for the taxpayer, his or her spouse, and other dependents. If you are self-employed, the tax-deductibility rules are a little different: You can take the amount of the premium as a deduction as long as you made a net profit; your medical expenses do not have to exceed a certain percentage of your income. The tax deduction is generally not available with so-called hybrid policies, such as life insurance and annuity policies with a long-term care benefit. 

There is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Following are the deductibility limits for tax year 2022. They are the same as in 2021, with the exception that for those in the age 60 to 70 age range the IRS reduced the limit by $10, from $1,420 to $1,410.  Any premium amounts for the year above these limits are not considered to be a medical expense.

Attained age before the close of the taxable year	Maximum deduction for year
40 or less	$450
More than 40 but not more than 50	$850
More than 50 but not more than 60	$1,690
More than 60 but not more than 70	$4,510
More than 70	$5,640

Another change announced by the IRS involves benefits from per diem or indemnity policies, which pay a predetermined amount each day. These benefits are not included in income except amounts that exceed the beneficiary's total qualified long-term care expenses or $390 per day, whichever is greater.

For these and other inflation adjustments from the IRS, click here.  

What Is a "Qualified" Policy?
To be "qualified," policies issued on or after January 1, 1997, must adhere to certain requirements, among them that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features. Policies purchased before January 1, 1997, will be grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state in which they are sold. 

Better Than No Loaf: Medicaid Planning Using "Half a Loaf" Strategies

While it is preferable to conduct long-term care planning well in advance of needing care, if you haven’t planned ahead, there are some strategies available to avoid spending all your assets. Three so-called "half a loaf" approaches allow a Medicaid applicant to give away some assets while still qualifying for Medicaid. 

In order to be eligible for Medicaid benefits a nursing home resident may have no more than $2,000 in "countable" assets (the figure may be somewhat higher in some states) in addition to the home, and the resident cannot have recently transferred assets. (A spouse living at home may keep more.)

Congress has imposed a penalty on people who transfer assets without receiving fair value in return. This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period does not begin until the person making the transfer has (1) moved to a nursing home, (2) spent down to the asset limit for Medicaid eligibility, (3) applied for Medicaid coverage, and (4) been approved for coverage but for the transfer. 

If a Medicaid applicant has excess assets, he or she must spend down those assets in order to qualify for Medicaid. However, Medicaid applicants who want to preserve some assets have a few options: 

• Gift and cure. The nursing home resident transfers all of his or her funds to the resident’s children (or other family members) and applies for Medicaid, receiving a long ineligibility period. After the Medicaid application has been filed, the children return half the transferred funds, thus “curing” half of the ineligibility period and giving the nursing home resident the funds he or she needs to pay for care until the remaining penalty period expires.
• Promissory note. The nursing home resident gives half of his or her funds to the resident’s children (or other family members) and lends them the other half under a promissory note that meets certain requirements in the Medicaid law. The resident uses monthly repayments of the loan, along with his or her income, to pay nursing home costs during the penalty period.
• Annuity. The nursing home resident gives half of his or her funds to the resident’s children (or other family members) and uses the remaining assets to buy an immediate annuity. In most states the purchase of an annuity is not considered a transfer that would make the purchaser ineligible for Medicaid. Income from the annuity can be used to help pay for long-term care during the Medicaid penalty period that results from the transfer. In such cases, the annuity is usually short-term, just long enough to cover the penalty period.

These strategies may not work in every state and none of them should be attempted without the help of an attorney whose practice includes Medicaid planning. 

The Top Eight Mistakes People Make With Medicaid

Medicaid planning can be a difficult and confusing process. The following are some common mistakes people make when planning to apply for Medicaid.

• Thinking it's too late to plan. It's almost never too late to take planning steps, even after a senior has moved to a nursing home.
• Giving away assets too early. First, it's your money (or your house, or both). Make sure you take care of yourself first. Don't put your security at risk by putting it in the hands of your children. Precipitous transfers can cause difficult tax and Medicaid problems as well.
• Ignoring important safe harbors created by Congress. Certain transfers are allowable without jeopardizing Medicaid eligibility. These include: transfers to disabled children, caretaker children, certain siblings and into a trust for anyone who is disabled and under age 65; a transfer to a 'pay-back' trust if under age 65; and a transfer to a pooled disability trust at any age.
• Failing to take advantage of protections for the spouse of a nursing home resident. These protections include the purchase of an immediate annuity, petitioning for an increased community spouse resource allowance, and in some instances petitioning for an increased income allowance or refusing to cooperate with the nursing home spouse's Medicaid application. 
• Applying for Medicaid too early. This can result in a longer ineligibility period in some instances.
• Applying for Medicaid too late. This can mean the loss of many months of eligibility.
• Not understanding how Medicaid affects your home. Nursing home residents do not automatically have to sell their homes in order to qualify for Medicaid, but that doesn't mean the house is completely protected. The state will likely put a lien on the house while the resident is living and attempt to recover the property after the resident has passed away.  
• Not getting expert help. This is a complicated field that most people deal with only once in their lives. Tens of thousands of dollars are at stake. It's penny wise and pound foolish not to consult with an attorney who knows how to guide clients through the process.

The Attorney's Role in Medicaid Planning

Do you need an attorney for even "simple" Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be "yes."

The social worker at your mother's nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you're applying for Medicaid, you may have missed out on significant planning opportunities.

The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. This may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.

If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets.

Annuities and Medicaid Planning

In some circumstances, immediate annuities can be ideal Medicaid planning tools for spouses of nursing home residents. Careful planning is needed to make sure an annuity will work for you or your spouse. 

An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life.

In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it's not a problem.

In order for the annuity purchase not to be considered a transfer, it must meet the following basic requirements:

1. It must be irrevocable--you cannot have the right to take the funds out of the annuity except through the monthly payments.
2. You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000).
3. If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy.
4. The state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant's behalf.

Example: Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $128,640 (in 2020). However, Mrs. Jones has $238,640 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.

In most instances, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain -- a guaranteed number of payments no matter the lifespan of the annuitant -- the term must be shorter than the life expectancy of the healthy spouse. Further, if the community spouse does die with guaranteed payments remaining on the annuity, they must be payable to the state for reimbursement up to the amount of the Medicaid paid for either spouse.

All annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility.

Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home. However, in some states immediate annuities may have a place for single individuals who are considering transferring assets. Income from an annuity can be used to help pay for long-term care during the Medicaid penalty period that results from the transfer. In such cases, the annuity is usually short-term, just long enough to cover the penalty period.

In short, immediate annuities are a very powerful tool in the right circumstances. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose. The use of immediate annuities as a Medicaid planning tool is under attack in some states, so be sure to consult with a your attorney before pursuing the strategy described above.

New Law Makes Big Changes to Retirement Plans

President Trump has signed a spending bill that makes major changes to retirement plans. The new law is designed to provide more incentives to save for retirement, but it may require workers to rethink some of their planning. 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes the law surrounding retirement plans in several ways:

• Stretch IRAS. The biggest change eliminates “stretch” IRAs. Under current law, if you name anyone other than a spouse as the beneficiary of your IRA, the beneficiary can choose to take distributions over his or her lifetime and to pass what is left onto future generations (called the "stretch" option). The required minimum distributions are calculated based on the beneficiary’s life expectancy. This allows the money to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries. The SECURE Act requires beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals would take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision will apply to those who inherit IRAs starting on January 1, 2020.  
• Required minimum distributions. Under prior law, you have to begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions. 
• Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.
• Employers. The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
• Annuities. The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
• Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances. 

Given these changes, workers need to immediately reevaluate their estate plans. Some people have used stretch IRAs as an estate planning tool to pass assets to their children and grandchildren. One way of doing this has been to name a trust as the IRA’s beneficiary, and these trusts may have to be reformed to conform to the new rules. If a stretch IRA is part of your estate plan, consult with your attorney to determine if you need to make changes.

To read the legislation, click here.  For more on the new law, click here and here.

IRS Issues Long-Term Care Premium Deductibility Limits for 2020

The Internal Revenue Service (IRS) has announced the amount taxpayers can deduct from their 2020 income as a result of buying long-term care insurance.

Premiums for "qualified" long-term care insurance policies (see explanation below) are tax deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of the insured's adjusted gross income.  

These premiums -- what the policyholder pays the insurance company to keep the policy in force -- are deductible for the taxpayer, his or her spouse and other dependents. (If you are self-employed, the tax-deductibility rules are a little different: You can take the amount of the premium as a deduction as long as you made a net profit; your medical expenses do not have to exceed a certain percentage of your income.)  Additionally, these tax deductions allowed by the IRS for long-term care insurance premiums are generally not available with so-called hybrid policies, such as life insurance and annuity policies with a long-term care benefit. 

However, there is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Following are the deductibility limits for tax year 2020. Any premium amounts for the year above these limits are not considered to be a medical expense.

Attained age before the close of the taxable year	Maximum deduction for year
40 or less	$430
More than 40 but not more than 50	$810
More than 50 but not more than 60	$1,630
More than 60 but not more than 70	$4,350
More than 70	$5,430

Another change announced by the IRS involves benefits from per diem or indemnity policies, which pay a predetermined amount each day.  These benefits are not included in income except amounts that exceed the beneficiary's total qualified long-term care expenses or $380 per day, whichever is greater.

For these and other inflation adjustments from the IRS, click here. 

What Is a "Qualified" Policy?

To be "qualified," policies issued on or after January 1, 1997, must adhere to certain requirements, among them that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features. Policies purchased before January 1, 1997, will be grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state in which they are sold. 

What to Look for When Buying an Annuity

An annuity can be a useful tool for long-term care planning, but annuities are also complex financial products that are hard to understand. If purchasing an annuity, you need to consider your options carefully. 

An annuity is a contract with an insurance company under which the consumer pays the company a certain amount of money and the company sends the consumer a monthly check for the rest of his or her life, or for a certain term. Annuities come in many flavors. They can be deferred (begin paying out at a later date) or immediate (begin paying out right away). They can pay a fixed amount each month or pay out a variable amount based on how the money is invested. While a fixed immediate annuity can be a good Medicaid planning option for a married couple, other annuity products can be quite complex and confusing and are not right for everyone. 

If you have decided an annuity is the right choice for your long-term care or retirement plan, you need to shop around to find the right product. The following are some purchasing tips:

• Check the terms. Be sure to read the annuity contract carefully. Annuities often have surrender charges that penalize you for withdrawing your money too early. You need to understand for how long you won’t be able to access your money and when payouts begin. There may also be other fees associated with the annuity as well as optional riders. Understanding the fees will allow you to shop around to find the best product. 
• Choose your salesperson. Insurance companies often pay generous commissions to the brokers who sell their particular annuities, payments that many of the brokers don't disclose. They also generally don't disclose whether they are paid more or less by one insurance company than another or whether the annuity being sold is the best option for the consumer. Ask your broker questions to determine how they are paid. You may want to seek a second opinion to make sure your salesperson isn't steering you into a product that isn't right for you. 

Select a sound insurance company. Annuity payments are often supposed to last a lifetime, so you want an insurance company that will stick around. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moody’s, Standard & Poor’s or Weiss.

When the IRS Speaks, Retirees Need to Listen

“Workers aren’t the only ones who need to double-check that they’re withholding sufficient taxes. The IRS is warning retirees to ensure they're paying enough federal income tax.”

The IRS embarked on a big awareness campaign since the summer, telling taxpayers they should review and update their withholding numbers at work to ensure that they are paying enough federal income tax. But they’re not the only ones who should be checking their numbers, reports CNBC in the article “The IRS is warning retirees of this impending surprise tax.” Retirees who fail to update withholding from pensions or annuities may be in for a surprise, and it won’t be a good one.

It’s easier to say people should do this, than for them to do it, however.

Once people leave the workplace, they start drawing down income from several different sources. That usually means Social Security, IRAs, pensions and annuities.

While they were working, they didn’t have to think about income taxes, unless they were self-employed. Their payroll company or HR department took care of that.

Now, they must pay estimated taxes every quarter to the IRS.

There are two issues: making sure you remember to pay the tax on a timely basis and making sure that you pay the correct account. Some accounting firms send their clients reminders.  However, that doesn’t always do the job.

How can you make this easier?

There are new withholding tables from the IRS. Speak with your accountant. Make sure you have enough money set aside for quarterly tax payments.

If you’re single and your AGI (Adjusted Gross Income) plus nontaxable interest and half of your Social Security benefits are more than $34,000 (or $44,000, if you’re married), as much as 85% of your Social Security benefits could be taxed. If that seems like a lot, you’re right.

One alternative: use the IRS Form W-4V to withhold a flat rate from each check. Depending on your situation, you can withhold 7%, 10%, 12% or 22%.

If pension or annuity payments are an income source, you can also have taxes withheld from your income, using IRS Form W-4P, and chose the number of allowances you want to claim.

Work with your accountant to get a clear picture of your tax liability and do that now. If you want to avoid a nasty tax surprise in the spring, get it all done well before the end of 2018. You must know what you will need to pay. Especially for new retirees, it’s not easy to figure it out.

Reference: CNBC (Sep. 12, 2018) “The IRS is warning retirees of this impending surprise tax”