Year-End Tax Tips – 2012 Edition

I don’t remember a time when there was more uncertainty over the tax scheme in the years ahead. Both parties have very different visions about where they want this country’s tax code to go – and they are at variance with the current law, which will automatically enact a substantial tax increase in January that nobody wants. But the two sides may not be able to come to a year-end agreement – particularly if the opposition party wants to hamstring whoever wins the White House this year by sticking them with the sequestration tax increases, spending cuts, and probable recession that would result.

Despite the uncertainty, though, there are some moves I’m comfortable suggesting:

• Harvest those tax losses. If you have an investing portfolio with both winning positions and losing positions in it, you can use your losses to cancel out your gains – reducing or eliminating your capital gains tax for the year – a technique called “tax loss harvesting.” If you have more losses than gains in any given year, you can deduct those losses against future capital gains. If you have no capital gains to deduct them against in the following years, you can use those losses to cancel out up to $3,000 of income per year.
• Sell winners. Consider doing so even if you can’t offset capital gains with losses: Taxes on capital gains are set to increase by as much as 33 percent come January 2013, when the tax on long-term gains will increase from 15 percent to 20 percent.
• Close out any sales of closely-held businesses you’re trying to put together, for the same reason. If you sign over appreciated stock in your own corporation, or assets at a profit, delaying the transaction from December to January could be very expensive.
• Remember the 3.8 percent surtax on capital gains. If you make more than $200,000, or $250,000 as a married couple, it’s even more important to move gains into this year to avoid the 3.8 percent tax on capital gains imposed by the Affordable Care Act. That’s in addition to the across the board capital gains increase.
• Careful with mutual funds. Are you considering a mutual fund? Look up the funds’ distribution date, which often falls in November. If the fund has a lot of embedded capital gains, you could get stuck with a big taxable distribution. That means you will have to pay capital gains tax on money other people made. That doesn’t mean mutual funds don’t make sense. Just go in with your eyes open.
• Do you control a C corporation? Take as much dividend income as you can this year. If you wait until next year, you could wind up paying 39.6 percent on those dividends, rather than the 15 percent on qualified domestic dividends you get this year.
• Oops… did I say 39.6 percent? Add the 3.8 percent Medicare surtax to that figure if you wait until next year. That’s what will happen under current law, unless Congress intervenes. I suspect it will… I don’t think either Republicans or Democrats want a full sunset of the Bush tax cuts, plus the Medicare surtax to hit all at once. But Congress has done dumb things before – and you can’t ignore what the law on the books says now.
• Self-employed? Try to push income to 2012 rather than take in 2013, if possible. That will save you 2 percent on your self-employment tax, since the employee’s share of the tax is increasing by 2 percent as of January 1, from 4.2 to 6.2 percent.
• Schedule an AMT review with your tax advisor. You may need to make some moves with stock options, or push certain deductions to a non-AMT year. You may also want to accelerate income to the current year, or hold off on constructive receipt of income until 2013, depending on your overall situation. Everyone is different when it comes to the AMT.
• Do you itemize? Schedule a Pease limitation review with your tax advisor. You might want to push deductions to this year rather than risk losing the ability to take certain deductions next year

These are just the basics. There is a lot to discuss when it comes to taxes as we come to the end of the year. We’ll certainly be covering them, looking at these in more detail and digging into other year-end tax planning issues, too. Keep tuning in to my blog Penge Snak!

An Introduction to Long Term Care Insurance and Planning Considerations

According to the National Clearinghouse for Long-Term Care, a federal depository of long term care information and statistics, the average cost of a stay in a nursing home in Oregon was $246 per day. That’s more than $89,000 per year – enough to totally swallow most pensions.

More than that, an extended stay in a long term care facility can force families to liquidate assets prematurely in order to pay long term care costs. It is not uncommon for the costs of chronic or custodial long term care to totally evaporate a family’s entire legacy.

Even if you or a loved one doesn’t need a skilled care facility, the costs of an adult day care facility – fairly low on the continuum of care – still averages $79 per day, statewide, as of 2010.

Assisted living facilities cost an average of $3,120 per month in Oregon.

Want in home care? That’s going to run you an average of $22 per hour, in Oregon, at today’s prices.

But bear in mind that long term care insurance you buy today will hopefully not pay a benefit for many years in the future.

Don’t Count on Medicare

Medicare doesn’t cover long term care, in any significant way. Medicare only covers about three months of care, and only for acute conditions as a result of a qualifying hospitalization. Medicare provides no coverage for long-term chronic conditions that do not require acute care.

Medicaid is a Last Resort

Many people are under the impression that the government must provide for their long term care needs. Under current law, that’s true: The State of Oregon does provide some limited long term care, under Medicaid auspices. But with some exemptions, Medicaid only provides benefits for those who have impoverished themselves first. Except for a small exemption for home equity, a small allowance for spouses still in the community and not requiring Medicaid benefits, and a few other items, you must pretty much spend yourself down to your last couple of thousand dollars in the world to qualify for Medicaid.

Specifically, you can keep up to $2,022 if you are single, and $21,912 if you are married. Couples with assets above $21,912 may be required to split their assets and spend down before becoming eligible for Medicaid assistance. You can also keep a home (though not a home with more than $500,000 in equity), a burial fund of $1,500, a modest family car, and some household goods and personal effects.

That’s about it.

Even if you have some home equity, the government will come seize your home after you’re gone, or your spouse is gone, to recoup as much of the costs of long term care as they can, courtesy of the Medicaid Estate Recovery Program.

Don’t try to circumvent the rules by giving away your assets. Under the terms of the Deficit Reduction Act of 2006, Medicaid officials have a “lookback” period of up to 5 years. Any gifts you made during this time are still counted against you for the purpose of Medicaid eligibility.

Receiving a pension? You’re in trouble, unless the pension is very small: If you receive too much money from any source per month, you could find yourself disqualified for Medicaid. Long term care is the beast that eats income – and then washes it down with an asset chaser.

Long term care insurance, then is an important part of retirement planning. Indeed, it’s vital for the middle class. Only the very wealthiest among us can afford to write a check for the tremendous costs of long term care. For the middle class to affluent and even well into the millionaire zone, you will need to plan carefully.

What Long Term Care Insurance Covers

Typically, long term care insurance provides a maximum daily benefit to offset nursing home or assisted living facilities. For example, a typical plan I see might be a $225 maximum daily benefit. That’s a benefit of up to $82,150 per year. If you have a 10 year cap, that’s a maximum benefit of $821,500.

You can elect plans that don’t cover in-home care (which cost a little less) to plans that cover a substantial portion of in-home care. This can be an important consideration because it gives the insured individual and his family choices. You may be able to stay at home with loved ones much longer with a little assistance during the day – possibly allowing family members to work – than you could without some assistance.

Usually, benefits kick in when you lose the ability to accomplish at least two of the usual activities of daily living: Bathing, dressing, eating, transferring, continence and toileting. Alternatively, benefits are payable if you need close assistance and supervision due to a severe cognitive impairment such as Alzheimer’s Disease or dementia.

In the weeks ahead, we’ll be taking a closer look at the various aspects of long term care insurance and planning, and the roles it can take in your life.

Do I Need Long Term Care Insurance?

In my view, it makes sense for most people to buy at least some coverage. It seems to be a good deal in the long run. You can tell because of the overwhelming trend of insurance companies that sell LTC policies – or which used to sell it – to either cease issuing new policies, or raise rates substantially. This tells me that the overall trend has been to underprice these policies significantly. And it’s no wonder – the risk is nearly impossible for actuaries and underwriters to predict.

I usually recommend buying an amount you can easily afford—and to start doing it young. It’s ok to have multiple policies. Indeed, in some ways, it’s advantageous. I do not recommend buying an amount you have to strain to afford, because a lapsed policy does you no good.

If you have a home, or assets to protect from Medicaid recovery agents, you should definitely give serious thought to buying a total benefit equal to your assets, at least. More on long term care partnership programs in a future column.

Use solid, highly-rated insurers with good track records, and keep things at a level you can afford.

Large Insurers Help Increase Your Bargaining Power With Health Care Providers