Tuesday Tax Tips & Tidbits - Qualified Charitable Distributions

Did you know it’s possible to get a tax benefit from a charitable contribution even if you don’t itemize deductions?  In year-end legislation, qualified charitable distributions (QCDs) from individual retirement accounts (IRAs) were made a permanent part of the tax law.   This means that taxpayers 70-1/2 and older may donate all or part of their required minimum distribution to a qualified charity and not include it in their taxable income.  The distribution needs to be made directly from the IRA to the charity. There are advantages to QCDs as opposed to taking a taxable IRA distribution and then contributing the proceeds to a charity. That’s because taxable IRA distributions must be included in adjusted gross income.  This affects items such as the taxable portion of Social Security benefits, deductions limited by AGI, and possibly future Medicare insurance premiums.  QCD’s can be an important vehicle for those who wish to donate to charities and are not dependent on their IRA distribution for living expenses. 

Here's the fine print:    The amount of a QCD is limited to the amount of the distribution that would be included in income, up to $100,000 annually.  The QCD must be, aside from the percentage of AGI limits, eligible for a charitable contribution deduction and adequate documentation obtained.  See IRS Publication 590-B for details.  

This information is for general and educational use only and not intended as tax or legal advice.  Tax situations vary significantly from person to person so it's always best to consult your own professional preparer for deductions that may apply to you.

Tuesday Tax Tips & Tidbits - Silver Lining: Deduction for Chronically Ill

Most everyone is aware of the high cost of long term care, but many may not realize that it is typically not covered by Medicare or Medi-gap insurance.  This expense can create a hardship for seniors and their families, but there is a way to get partial relief through an income tax deduction.  Taxpayers who meet the IRS definition of "chronically ill" may be able to deduct all of their care expenses, including personal care.  This means if they live in a retirement facility, even rent and meals could be deductible.  In some cases, it is enough to offset all of their federal income tax. 

The IRS defines chronically ill as someone who:

  • is unable to perform at least two activities of daily living for at least 90 days within the past 12 months(activities of daily living are eating, toileting, transferring, bathing, dressing, continence) 
  • OR requires substantial supervision for protection from threats to health or safety due to severe cognitive impairment

Care must be provided pursuant to a written plan prescribed by a licensed healthcare practitioner, although the services do not have to be provided by a nurse.  Obtain a copy of the care plan every year and keep with your tax records.

Here are some examples:

1)  Daisy lived in her own home until January of 2015 when she fell playing badminton and broke her hip.  After a stay in the hospital followed by rehab, she moved to Greenlawn Assisted Living in May of 2015.  Before being released from rehab, the nurse wrote out a care plan stating Daisy now requires daily assistance with dressing, bathing, and cooking. On her 2015 federal income tax return, Daisy may be able to deduct all rent, meals and personal care services paid to Greenlawn.  

2)  Harley has been diagnosed with Alzheimer's disease and, according to his doctor, is in the severe stage.  His children are concerned that he will wander at night and found an opening at Serene Place Dementia Care where he will have supervision 24-7.  All of the payments made to Serene Place are likely to be tax deductible on Harley's federal income tax return.

Keep in mind medical expenses are deductible only if the taxpayer itemizes deductions and has medical expenses in excess of 7.5% of income (10% if younger than age 65).  Also, there may still be state tax to pay since not all states allow a deduction for medical expenses.   

This information is for general and educational use only and not intended as tax or legal advice.  Tax situations vary significantly from person to person so it's always best to consult your own professional preparer for deductions that may apply to you. 

Elizabeth Zeldes, CPA                                                                                                 February 2016