Copyright 1996, Marc S. Weissman
Weiss & Weissman, San Francisco, California
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This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

New Tax Laws!

By now, the President has probably signed 4 new laws already passed by Congress, affecting taxation. Most of these are effective 1/1/97.

Individuals

Effective January, 1997, long-term health care insurance benefits will become tax free to the extent they do not exceed $175 per day or (if more than $175 per day) reimburse actual long- term health expenses.

Modest premiums on such policies are now deductible as itemized medical costs. Since medical deductions help ONLY if they exceed the 7.5% floor (if your adjusted income is $100,000, only the portion of medical deductions over $7,500 saves tax), this typically applies to retired people with lower incomes, or ill people with higher health care costs.

The amount eligible for deduction is age dependent: only $375 per year may be deducted for a 45 year old; $2,000 for a 61 year old person.

As most people do not hit the floor allowing any deductibility, this sounds good, but...

Expansion of Medical Expense Definition

The definition of expense eligible for medical deductions has expanded to include costs paid to a non-relative for maintenance or personal care services required by a chronically ill person (who is unable to perform at least 2 of the following functions by himself: eating; toileting, transferring, bathing, dressing and continence).

Dad is chronically ill. He hires a person (not related to Dad) to help with personal grooming and care. The cost now qualifies as a medical deduction.

But, if Dad is chronically ill, he probably is not earning enough to file tax returns, so the deduction is useless unless Son can claim Dad as a dependent. Then, the cost is added to Son's medical deduction, and that portion above the 7.5% floor (based on Son's income), is deductible.

If the aide is related to Dad, to be deductible, that relative must be licensed to provide those services.

Viatical Settlements

Viatical Settlements are payoffs of life insurance to a terminally ill person before his death. Previously, those payments were subject to income taxation.

Bob has AIDS. He is diagnosed as having less than 24 months left. He has a $1,000,000 life insurance policy. The insurer offers to pay Bob $600,000 now, in full settlement, rather than $1,000,000 to Bob's heirs. Effective January 1, 1997, it is tax free to Bob. Today (1996), Bob must pay income tax on the payoff (to the extent it exceeds his investment in the policy).

IRAs used for Medical Costs

The penalty-free withdrawal from IRAs to pay medical expenses (for a person or his dependents) applies only to a person on unemployment for at least 12 weeks within the last 2 years. It is still subject to income tax.

Self Employed Health Insurance above-the-line Deduction increases: 30% in 1996; 40% in 1997; up to 80% in 2006.

Medical Savings Accounts

Medical Savings Accounts sound great, but are extremely limited. This is a new 4 year test program which applies to people (employed by a business with fewer than 50 employees) with high deductible (between $1,500 and $2,250 for an individual; and between $3,000 and $4,500 for a family) health insurance. Up to 65% or 75% of the deductible may be contributed tax free annually to an MSA. Unlike an IRA, medical costs paid from a MSA are not taxable.

At most, $3,375 may be contributed (75% of $4,500), possibly saving $1,316. But most people are ineligible.

Adoption expenses up to $5,000 ($6,000 if the adoptee is disabled) per minor child qualify as a non-refundable tax credit, but exclude costs of adopting a spouse's child.

"Deadbeat Dads" look out! IRS may now collect unpaid child support in certain circumstances.

SMALL BUSINESS NEWS:

First year `bonus' depreciation (the right to write off purchases, rather than depreciating them over 5 or more years) limits increase gradually over the next 6 years to $25,000 annually.

S Corporations can have 75 (up from 35) shareholders; more entities may own S Corp stock; technical requirements have been loosened.

SIMPLE Retirement Plans

Basically, this is similar to an IRA.

Option 1: The employer must contribute an equal amount as the employee, of 1% to 3% of compensation (up to $150,000 per year). The employer decides how much to offer; the employee decides how much to contribute and the employer matches that amount.
Joe makes $400,000. His employer offers a 2% plan. Joe can contribute 2% of compensation (up to $150,000), or $3,000. The employer matches Joe's contribution.
Option 2: The employer may contribute (but the employee may not), up to 2% of compensation (up to $150,000 per year).

Non-working Spousal IRA goes up to $2,000, up from $250.

TAXPAYER BILL OF RIGHTS 2 makes good politics, but gives little real protection.

BAD NEWS ESTATE PLANNING

It happens all the time. Mom dies, leaving the house to her 2 children. One wants to sell; the other wants to live there. Who wins?

In California, there is (almost) an absolute right of any co-owner to force a sale of the whole property. This is called a lawsuit for partition. [In farming days, the property could be split (partitioned) into separate portions; then one could sell and the other remain. Now, in modern times, the only solution usually is to sell the property and divide the money.]

Mom left a valuable property to her 2 daughters, one of whom is now suing her sister to force a sale of the whole property. Mom's best wishes have resulted in a sister against sister lawsuit, where the only winners will be the lawyers.

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