This article article was published in the "New Rochelle Review" in the March 2006 issue.

“Life And Money”  TM –  Tax Tips for Tough Times - Part 2

By Frank Sisco, CPA, PFS

Tough times are a part of life for most of us at one time or another, caused a death in the family, an illness, injury or disability, a failing business, a lost job, damage caused by nature, a ravaging illness, emotional conflicts, and the list goes on. Cutting current and future taxes is one way to reduce the related financial harm.  In last month's column there was a discussion of several steps to take to save taxes when a business incurs significant losses.  This month's column deals with tax tips associated with an illness, injury or disability and the related high medical expenses and/or long-term care costs.

Sadly, many ill, injured or disabled people, who are often seniors, find themselves paying significant amounts of medical expenses, especially for long-term care, most of which is not covered by regular health plans or Medicare.  In years when these expenses exceed income, a person should consider generating taxable income to make some use of these losses, rather than incur the income in a year when there are not such expenses and the income would be taxed.  One way to generate taxable income is to sell appreciated assets such as a house or investment securities, offsetting the gains against the expenses.  This may also provide needed funds for future expenses.  Another step is to withdraw from tax-deferred accounts, such as IRAs, other retirement plans and tax-deferred annuities, as discussed in detail in last month's column.

Many seniors have long-term care insurance, for which certain amounts of premium are deductible as medical expenses.  Furthermore, expenses incurred at a nursing home or other long-term care facilities, generally, are more easily deductible due to recent tax legislation.

In the past, some seniors would strip themselves of assets by transferring them to family members, such as children, wait a certain length of time, and then apply for Medicaid, so that Medicaid would pay the medical costs.  This strategy has been made much more difficult by the new tax legislation (Deficit Reduction Act of 2005) signed by President Bush on 2/8/2006.  The Act, among other things, extended the look-back period for transfers after 2/8/2006 to five years from three years, and starts the penalty period for the transferred assets at the time the applying person enters the nursing home, rather than starting the penalty period at the time of the transfer.  It is not yet clear how New York State will adhere to the Federal law, but anyone considering Medicaid planning should seek expert guidance.

There are certain tax benefits for a terminally ill individual.  If he or she receives an acceleration of death benefits from a life insurance policy, which is allowed by several insurance companies, the benefit can be tax-free, subject to certain conditions.  Also, if a person sells their life insurance policy in connection with a viatical settlement, the proceeds can be excluded in full from income for the terminally ill individual or excluded up to the amount of the unreimbursed qualified long-term care expenses in the case of the chronically ill individual.

For someone who suffers a disability, injury or illness, it may be necessary to modify the home or install special equipment, for which the costs are deductible medical expenses.   Examples are constructing an entrance or exit ramp, widening doorways or hallways, installing railings, grading the ground, installing a chair lift, adding handrails, etc.

Future columns will cover tax tips related to other types of tough times.

About the author

Frank Sisco is a CPA and Personal Financial Specialist, and author of many articles about personal finance and issues of life and money.   His firm, Financial Management Corporation, is located in Harrison, NY.  Frank makes his home with his wife and daughter in New Rochelle, NY.  He can be reached at 914.381.3737 or by email at ideasmoney@aol.com.  Visit his website at www.LifeAndMoney.com, which contains this and prior articles.

Submitted 3/19/06

by Frank Sisco