Article By: Jeff Skolnick, CPA, M.S. Taxation

According to a survey on the Genworth website, the cost of assisted living facilities are nearing $50,000 per year and nursing homes are edging closer to $100,000 per year. This is a lot of money and nobody pays these exorbitant rates unless they have to.

I want to make sure if for some reason you find yourself or a loved one in such a predicament you want to look into the possibility of deducting the costs of the long-term care facility.

Most of us are familiar with the fact that in order to utilize medical expenses as an itemized deduction for Federal tax purposes, medical expenses must exceed 10% of our Adjusted Gross Income (AGI).

One of the items allowed as a medical expense under the tax law is “qualified long-term care services”. Here’s where you have to pay attention to a number of details. This by the way is also why I recommend if you suspect you may be in this situation that you contact a tax professional. This deduction can be worth thousands and thousands of dollars, so you want to make sure you get this right.

The internal revenue code states:

 “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which—

(A) are required by a chronically ill individual, and

(B) are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Now that we know the definition of qualified long-term care services, we must now determine the definition of a chronically ill individual.

A chronically ill individual is anyone who has been certified by a licensed health care practitioner as being unable to perform at least 2 activities of daily living without substantial assistance from another individual for at least 90 days due to a loss of functional capacity. An individual may also be classified as chronically ill if one of the aforementioned licensed health care professionals certifies the individual requires substantial supervision to protect the individual from health and safety threats due to severe cognitive impairment.

A licensed health care practitioner is defined as a physician, registered professional nurse or licensed social worker.

The activities of daily living are also defined in the tax code. They are as follows:

• Eating
• Toileting
• Transferring
• Bathing
• Dressing
• Continence

All of the above is a long-winded way of defining how an individual qualifies his/her long-term care facility costs as qualified medical expenses.  Now that you have a rough understanding of the background I will give you the simplified version. If a licensed health care practitioner prescribed the plan, then you will be able to deduct the expenses.

I have encountered situations where I had wealthy clients pay substantial amounts of money to live in facilities where they can transfer from unassisted living to assisted living to nursing home all within the same facility. A large portion of the money paid is to offset future medical expenses. These facilities will sometimes give you break downs of medical costs on an annual basis.

You must of course be very careful. I started out by stating the costs we are looking to deduct can be anywhere from $50,000 to $100,000. As you can imagine the IRS is going to want you to have substantiation if you are audited. This is, however, a deduction well worth taking if you qualify. I have deducted in excess of $100,000 of medical expenses on a taxpayer’s return and it dropped the individual’s income tax to $0. Once again, I stress that if you feel you may be able to take advantage of this medical deduction, consult with a tax professional and make sure you do it correctly. 

Article By: Jeff Skolnick, CPA, M.S. Taxation

I always liken taxpayers and tax laws to board games we played when I was a kid.  Every board game was roughly the same. It was a large piece of painted cardboard, a bunch of plastic pieces and a mechanism to move the plastic pieces around the board (dice, cards or some type of spinner). One person would read the directions on the bottom of the box while everyone else picked which plastic piece they would use while playing and then started goofing around waiting for the person reading the bottom of the box to explain the rules. These rules would explain how the pieces were to move around the board. The rules would dictate your strategy. Do I have to get into the finish area on an exact count? Are there are any areas that I must reach before my piece cannot be sent back further from the finish line? I look at tax laws as the instructions on the bottom of the box. When the laws change, we change the way we move our pieces around the board, or more directly the way we run our financial lives.

The Tax Cuts and Jobs Act passed in December of 2017 eliminated some deductions for individuals, but it also lowered the tax rates. The new tax law increased the standard deduction but eliminated exemptions. It also doubled the child care credit from $1.000 to $2,000 and raised the income limitations so many more people were able to claim it but restricted the amount of taxes that could be taken as an itemized deduction to $10,000. My point here is while both sides of the political aisle argue as to whether the new law helped the rich or the poor (there are parts that help and hurt both providing plenty of fuel for both sides), I say it favored businesses over individuals.

Almost every provision added in the business arena were helpful to businesses. I can think of a few provisions that work against businesses. I will discuss them shortly. For the time being I would like to concentrate on provisions in the tax law that you can utilize to keep more of your hard-earned cash.

The first assumption I make here, and it is a big one is that you are willing to have your own small business. It can be a traditional brick and mortar location or a network marketing business which you run from your home. It can be your full-time income or a just a side hustle. I am simply stating that in order for you to take advantage of the strategies I am about to discuss you must have a business.

The first provision and one that can save you thousands of dollars is section 179 expensing. Section 179 expensing stands for the internal revenue code section 179 and it allows a business to deduct in one year almost all new and used equipment it purchases. Without this provision businesses would have to deduct computers, computer software, copiers, furniture and equipment over varying lives from 3 to 7 years. There are some limitations. Most real property (real estate or improvements to real estate) is not allowed to be written off under section 179 but there are some qualified improvements that are exceptions. Additionally, passenger vehicles have limitations which I will discuss momentarily. Lastly this deduction is allowed for purchases of up to $1,000,000 annually. The deduction starts to phase out once you have made $2,500,000 in purchases. Your deduction phases out between $2,500,000 and $3,500,000 in purchases. Once your company purchases more than $3,500,000 of furniture and equipment in a year your total $1,000,000 deduction will have been eliminated. This is one of the areas that to me affects large businesses. I don’t know too many small businesses that make more than $2,500,000 of fixed asset purchase in one year. Virtually every small business owner can write off all of their furniture and equipment purchases in one year. I never encourage people to buy equipment for no reason, however, if you are considering a large purchase keep in mind the cost savings you will receive. I also would like companies to consider this far in advance of yearend. You don’t want to be running around the last week of the year trying to buy a piece of equipment before yearend.  Keep in mind there is an income limitation on section 179 expensing. In other words, if your section 179 expense throws you into a loss, you may have to carryover your deduction to a following year.

I did say passenger automobiles had to be treated differently. Luxury passenger vehicles (generally driven by small business owners or key personnel) have a limitation in the total depreciation allowed in a year. This provision overrides section 179 expensing just discussed and bonus depreciation which I will cover in the next section. Prior to 2018 the depreciation allowed for a vehicle over it’s first 5 years was limited to $23,060. The new law raised this amount to $47,120. While the limitation remains in place it becomes much easier to deduct the cost of your automobile. Keep in mind this $47,120 deduction occurs as follows; $10,000 in year one, $16,000 in year two, $9.600 in year three and $5,760 in each year thereafter.

Bonus depreciation is another provision that allows businesses to deduct items in one year similar to section 179 but not as restrictive in that you can have more than $3,500,000 in purchases and you may have a loss. Let’s say you purchased $5,000,000 of equipment in a year. Based on what you just learned you know your entire section 179 deduction is eliminated; however, you may be able to use bonus depreciation. Additionally, if you purchase a total of $1,500,000 in equipment in a year, you may take $1,000,000 as a deduction under section 179 and $500,000 under the rules of bonus depreciation. You could also simply take $1,500,000 as bonus depreciation and nothing under section 179. If you buy your equipment on or before December 31, 2022 you can write off 100% of the equipment. Each year subsequent to 2022 the percentage will drop (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% thereafter). Any portion of equipment purchased not allowed to be written off under bonus depreciation (for example if purchased in 2023 and only 80% is allowed as bonus depreciation) will be written off over the asset’s depreciable life. For example, if you purchase $4,000,000 of equipment and $3,200,000 is allowed as bonus depreciation, the remaining $800,000 will be depreciated over the life of the equipment (for example 5 or 7 years). Bonus depreciation now applies to both new and used property (previously it only applied to new property). This provision applies to basically the same assets as discussed in the Section 179 expensing paragraph, however, there are some exceptions. Most notably qualified improvement property.

I would like to make clear that many states either have their own section 179 limitations (for example New Jersey limits section 179 to $25,000) or do not allow bonus depreciation. Please keep in mind the rules that are in place for each taxing jurisdiction (Federal, state, city) to which you are subject. You do not want any surprises in April.

Here are a few of the items that did go against business:

• Business interest is limited to 30% of adjusted taxable income, but only for companies that average $25,000,000 or more in annual sales. 
• Net operating losses can longer be carried back 2 years (this allowed you to recoup taxes previously paid) but does allow you to carry forward these losses forever. The old law had them expire in 20 years.
• Entertainment expenses were eliminated.

There are also various types of retirement plans available to allow business owners to take large deductions on their return. It is imperative that you discuss retirement plans before yearend because many plans must be adopted (although not necessarily funded) before yearend. Once the year has closed you will have far fewer options.

The new 20% deduction for qualified business income of pass-thru entities which includes sole proprietorships, partnerships and S corporations. This would also apply to all LLCs with the exception of those that choose to be taxed as a C corporation. This deduction will also apply to rental real estate.  This new deduction, while very beneficial, also involves complications which are well worth navigating, but again you must allow for some planning. Decisions may have to be made on compensation for this year or even converting your LLC to be taxed as an S corporation next year.

While most small businesses are not C corporations, I did want to alert those that are:

• The corporate tax rate dropped to 21% in 2018.
• The Alternative Minimum Tax (AMT) was eliminated.
• Tax on personal service corporations was eliminated.

I would like to summarize by saying again that while there were varying benefits and consequences as a result of the new tax law for individuals, almost all businesses (large and small) were helped. I am stating no time has ever been better to start your own business. With today’s technology many businesses can be run from the comfort of your own home.

I want to state very strongly I am in no way encouraging any type of a tax scam. I am discussing legitimate small businesses only.

The tax laws were rewritten at the end of 2017. It is time to make sure you altered your strategy on how you move your plastic piece around the board.  My suggestion is opening a small business and/or utilizing the tax strategies I’ve just outlined in your existing business.

Just Getting Started? Download the Financial Startup Worksheet HERE

Article by: Jeff Skolnick, CPA, M.S. Taxation

The Tax Cuts and Jobs Act passed in December of 2017 eliminated the “individual mandate” of the Affordable Care Act (ACA) or (Obamacare). The individual mandate required individuals to purchase health insurance that met certain standards, or they would be subject to a penalty.  This penalty was calculated based on household income and the number of individuals covered within the household.

The new tax legislation had virtually all of its provisions take effect in 2018. One provision that did not come into play until 2019 was the repeal of the individual mandate.  As of 2019, if you do not have health insurance you will not incur a penalty on your Federal return.  

If that is the case, why would I say not so fast?  The reason for this statement is that some states have passed legislation which still requires individuals to maintain health insurance or incur a penalty on their state income tax returns. I urge every taxpayer to at least check once in a while and make sure they are aware of whether their state has instituted such legislation.

Massachusetts has had an individual mandate since 2007. New Jersey and Washington DC have both reinstated the ACA penalty beginning in 2019.  California, Rhode Island, and Vermont have also instituted penalties equivalent to the ACA penalties; however, these do not become effective until 2020.  I have recently read that other states, specifically Connecticut, Hawaii, Minnesota, and Washington, are also contemplating enacting similar laws.

I point this out because there was a lot of coverage at the time the Federal law passed about this repeal, but I do not feel the states that have issued mandates have been as visible, and I do not like to see anyone surprised come tax season.

I want to be clear the penalties I have been discussing so far only relate to individuals that did not have health care insurance that met the rules set forth by the Federal government.  If your coverage met the standards, you had no penalty.

I now would like to touch on the part of the ACA that remains. The premium tax credit provision still exists in the law. The premium tax credit is available to individuals that have low or moderate-income to help them afford coverage provided by the Health Insurance Marketplace.  

There are two ways in which to receive this credit. The first, and by far the more popular choice, is to have the marketplace calculate your expected credit and pay it to your insurance company to lower your monthly outlay.  The credit is based on your household income and number of individuals covered.  The second option is to pay all of your health insurance payments and receive the credit at the end of the year. It is clear why the first method is more popular. Health insurance is a major expense for most individuals and certainly for all who are going to receive a subsidy, so most simply do not have the money to lay out ahead of time and wait for a credit.  

I want you to realize that whichever method you choose, the amount of the credit is exactly the same.  

I will now explain that although I understand the first method, why I hate it as an accountant. If you are to receive a monthly benefit, you must understand that this is based on your estimated income and number of individuals covered.  If your actual income is higher or the number of individuals covered is lower than what you had given to the Marketplace, then you will owe money at the end of the year. If you overestimated your income or underestimated the number of individuals covered you may receive a refund at yearend.  I hate it because more often than not I have seen individuals that owe money rather than receive a refund. The problem is I have to, as an accountant, explain this to them.  Keep in mind I’m used to catching a little hell when individuals owe taxes, but here I’m catching hell for the fact that their credit was too high during the year when I didn’t give the insurance company their income or dependents, they did. 

I want to give you an example I ran into a few years back. I had an individual who reported his family income to the marketplace. He also reported the expected number of dependents. When we filed his return at the end of the year, he realized that one of his children who was covered in the prior year was now working a full-time job and not covered by him.  When I prepared the return I had to let this man know he had to pay back thousands of dollars to the Federal government.  This situation, unfortunately, resulted in me having a new name for this individual, former client.

I point this story out not to communicate that those eligible should not sign up to receive their credit monthly but to point out that if you do be careful about the information you give the Marketplace.  If during the year you discover that either your income is going to be greater than expected or the number of covered individuals will change alert the Marketplace.  Once again, I want to make sure there are no surprises that occur when you file your return.

Check out my podcast HERE for more tips!