California Bar Journal
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California Bar Journal

The State Bar of California


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Front Page - April 1999
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Legal specialist exam set Aug. 19
Sullivan to take reins at Stanford Law School
Only two appointed members remaining on State Bar board
Legal services board has five vacancies
Davis taps Michael Kahn
State Bar honors Justice Mosk with Witkin Medal
Board tentatively approves budget based on dues of $384
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If it distracts, so be it
Let's cut back on jury service
Limit bar to admissions and discipline
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From the President - Door to justice must be open
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Letters to the Editor
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Law Practice - Preparing for a successful mediation
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Appointments - Apply to serve on a bar committee
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Legal Tech - DSL speeds up Internet - at a reasonable price
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New Products & Services
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MCLE Self-Study
Taxes and long-term care
Self-Assessment Test
MCLE Calendar of Events
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Trials Digest
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Ethics Byte - Fiduciary duties basis for all rules
Attorney nabbed at State Bar offices for soliciting murders
Attorney Discipline
Ethics for the 21st Century - A canon for the future
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Public Comment


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Taxes and long-term care

It's important to know about benefits, precautions and requirements

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Planning for long-term care involves more than the preparation of powers of attorney and counseling on possible asset transfers to qualify for Medicaid reimbursement. Steps also should be taken to make certain that the person receiving care continues to file an income tax return and does so at a minimum possible income tax cost.

Practitioners should be familiar with the procedure for filing a return on behalf of an incapacitated individual. The medical expense deduction, while of little importance for most taxpayers, is critical for many elderly, particularly for those receiving long-term care.

Long-term care insurance and life insurance may be tapped as a financial resource for paying the costs of long-term care without fear of adverse tax consequences. Significant tax benefits also are available to families contributing to the cost of care.

When counseling an individual or an individual's family on long-term care, practitioners may wish to consult the following checklist.

Signing the return

An income tax return for an incapacitated taxpayer may be signed by:

A legally authorized representative, such as a conservator, I.R.C. 6012(b)(2);

An agent under a durable power of attorney if the power authorizes the agent to handle tax matters and a copy of the power of attorney is attached to the return, Treas. Reg. 1.6012-1(a)(5); or

The spouse signing the incapacitated person's name to the return if the spouse adds that it is being signed "by Husband (or Wife)" and attaches a statement to the return explaining why the other spouse cannot sign. Treas. Reg. 1.6012-1(a)(5).

Refund claims

When representing an individual of declining capacity, the practitioner should be alert to possible errors on the return. If an error is discovered, I.R.C. 6511 requires that a claim for refund normally be filed by the later of three years after the filing of the return or two years after payment of the tax. However, the limitations period is suspended during any period that:

The taxpayer is unable to manage financial affairs by reason of a medically determinable physical or mental impairment which can be expected to last for at least one year or result in death; and

The taxpayer, during such period of disability, is not represented by a conservator, agent under a durable power of attorney, or other person authorized to handle financial matters. I.R.C. 6511(h).

Supporting a parent

Children supporting a parent may be able to claim a personal exemption for the parent and deduct the parent's unreimbursed medical expenses which the child has paid. Children paying for a parent's care, either with their own or their parent's funds, should also be aware of the rules on payroll withholding for home and domestic workers.

David M. EnglishExemption

A child may claim a personal exemption for a parent if the parent:

Has gross income of less than the personal exemption amount ($2,750 in 1999);

Did not file a joint return for the year; and

Qualifies as the child's dependent. I.R.C. 151.

A parent qualifies as the child's dependent if the parent:

Received over half of his or her support from the child during the taxable year; and

Is a U.S. citizen, resident or national, or a resident of Canada or Mexico, for at least part of the taxable year. I.R.C. 152; Treas. Reg. 1.152-2(a).

Eligible support, whether provided by the parent or child, includes:

Food, shelter, clothing, medical care and similar benefits;

Benefits provided in-kind, such as the fair rental value of in-law quarters in the child's home; and

Social Security benefits expended on above items but not Medicare or Medicaid reimbursements. Treas. Reg. 1.152-1(a)(2); Rev. Rul. 79-173, 1979-1 C.B. 86.

Funds received by a parent only count in the support equation to the extent actually expended on support. Treas. Reg. 1.152-1(a)(2)(ii). To assure that the child pays for more than half of the parent's support needs, the child and parent should carefully coordinate expenditures and the source of funds used.

Kandis ScottSupport

While a child must ordinarily contribute more than half of a parent's support to claim a personal exemption for the parent, a child contributing less than 50 percent is entitled to the exemption if:

The child contributes at least 10 percent;

The child and other persons, as a group, contribute more than half the parent's support;

The other persons who have each contributed at least 10 percent sign declarations renouncing a right to claim the exemption, ordinarily on Form 2120;

The child claiming the exemption attaches the Form 2120 to the child's return. I.R.C. 152(c).

Parent's medical expenses

For a child to deduct on the child's return the medical expenses of the parent which the child has paid, the parent must qualify as the child's dependent under the test described above. I.R.C. 213(a). Eligibility to also claim a personal exemption for the parent is not necessary. Medical expenses paid by a child are deductible on the child's return if the parent qualified as the child's dependent either on the date the services were incurred or on the date payment was made. I.R.C. 213(a); Treas. Reg. 1.213-1(e)(3).

Before paying a parent's medical expenses in the hope of receiving a deduction, the child should make certain that the other requirements for the deduction are met. The child must have sufficient other deductions in order to itemize rather than claim a standard deduction. Also, even if the child itemizes, medical expenses are deductible only to the extent they exceed 7.5 percent of adjusted gross income. I.R.C. 213(a).

Withholding for domestic help

FICA (Social Security and Medicare tax) withholding is required on domestic help hired to provide care if the worker is paid more than $1,100 during the year (1999 figure). I.R.C. 3102(a), 3121. FUTA (unemployment tax) withholding is required if a care worker or workers were paid more than $1,000 in compensation during any quarter of the current or preceding calendar year. I.R.C. 3301, 3306. Withholding of both FICA and FUTA may be reported on Schedule H to the Form 1040 and paid with the filing of the return.

Withholding is required if:

The worker is a nonprofessional such as a nurse's aide or personal attendant; and

The worker is the employee of the taxpayer and not of an agency, measured by factors such as authority to hire, fix the rate of compensation and write the paycheck. Rev. Rul. 61-196, 1961-2 C.B. 155.

If a domestic worker is classified as the taxpayer's employee, the taxpayer, in addition to any required FICA or FUTA withholding, must prepare a W-2 but need not withhold income tax. I.R.C. 3401(a)(3).

Medical expense deduction

The costs of providing long-term care are deductible as medical expenses under I.R.C. 213 if the person receiving care is a "chronically ill individual" and the expenditures are for "qualified long-term care services" as defined in I.R.C. 7702B. Qualified expenses are deductible whether provided in a facility or private residence. The expenses are deductible if paid directly by the parent; if paid by the child, the parent must qualify as the child's dependent under the test described above. Like other medical expenses, eligibility to claim the deduction is beneficial only if the taxpayer itemizes and total medical expenses paid exceed 7.5 percent of adjusted gross income.

To claim a deduction for paying the expenses of long-term care:

The expense must be incurred to provide necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, or maintenance or personal care services;

The services must be provided pursuant to a plan of care prescribed by a licensed health care practitioner (physician, registered nurse, or licensed social worker); and

The taxpayer must be a "chronically ill individual" as certified by a licensed health care practitioner, requiring either: (a) a severe cognitive impairment necessitating substantial supervision to protect health and safety; or (b) a functional inability without substantial assistance to perform for at least 90 days at least two of six activities of daily living (eating, toileting, transferring, bathing, dressing and continence).

The premiums for long-term care insurance purchased by an individual are deductible as medical expenses under I.R.C. 213(d) if:

The policy is tax-qualified (covers qualified long-term care services of chronically ill individual plus other requirements - check specific policy for required certification by insurer);

The policy is not offered under either a cafeteria plan or flexible spending arrangement;

The annual premium does not exceed caps based on the insured's age, ranging from $210 per year (in 1999) for an individual age 40 or less, to $2,650 for an individual age 71 or older (partial deduction available if cap exceeded); and

The benefits paid will not exceed the actual costs of care or a daily indemnity of $190 (in 1999).

Accelerated death benefits

The proceeds of a life insurance policy sold to an investor under what is known as a viatical settlement or which are paid out by the insurance company under an accelerated benefits rider are fully excludable from gross income if the insured's basis in the policy (premiums paid less dividends and other returns) exceeds the proceeds received. Otherwise, proceeds paid to a living insured are excludable from gross income only if the payment qualifies as an accelerated death benefit under I.R.C. 101(g). To exclude the proceeds under I.R.C. 101(g), the insured must be either:

"Terminally ill," requiring a certification by a physician that the insured's death is reasonably expected to occur within 24 months; or

"Chronically ill," applying the same definition as applies for purposes of deducting direct payment of long-term care costs or premiums on long-term care insurance.

Practitioners also should be aware of the following.

Proceeds paid to terminally insureds are fully excludable from gross income, no matter how applied, but the exclusion for insureds who are certified as chronically ill is limited to the amount of qualified long-term expenses or the $190 daily limit;

Proceeds from a sale to a "viatical settlement" provider qualify for the exclusion only if the provider is licensed by the state or meets standards established by the National Association of Insurance Commissioners; and

The exclusion is not available if the policy is owned by a business in which the insured is an employee, officer or director or has a financial interest.

Kandis Scott teaches evidence, negotiation and clinical courses at Santa Clara University School of Law and formerly provided legal services for the poor and elderly. David English teaches wills and trusts, estate and gift taxation, estate planning and elder law, also at the Santa Clara law school. This semester he is the Fratcher Visiting Professor at the University of Missouri's Columbia Law School.