TAX ISSUES FOR SENIORSAllison McLeod, LL.M., CPAA Professional Limited Liability Co.a_m_mcleod@yahoo.com214.403.8622

THE BORING STUFF . . .This lecture is for educational and entertainment purposes only. This is not mean to be advice on your particular tax situation. Please consult your tax advisor to ensure that the information contained in this presentation is right for you.

“The art of taxation consists in so plucking

the goose as to obtain the largest amount of

feathers with the least amount of hissing.”

– Jean-Baptiste Colbert

WHO MUST FILE? (1 OF 2)

For taxpayers under 65, must file if gross income exceeds following levels even if no tax due (2018 thresholds):Single $12,000MFJ $24,000Surviving Spouse $24,000MFS $ 0Married living separately $ 0Head of Household $18,000

WHO MUST FILE? (2 OF 2)

Taxpayer must still file even if gross income below threshold if:

1.Taxpayer received advance payments of EIC.

2.Taxpayer has self-employment income > $400.

3.Taxpayer who is claimed as a dependent by another AND unearned income > $1,050 or gross income > standard deduction.

DETERMINING FILING STATUS (1 OF 2)

DETERMINING FILING STATUS (2 OF 2)

SURVIVING SPOUSE CRITERIAYear 1If not remarried, can claim MFJ.Can use MFJ tax schedule and MFJ standard deduction.

Year 2Cannot be remarried by end of Year 2.Must be a US citizen or resident.Must have a dependent living at home with taxpayer paying over ½ expenses of home.

TYPES OF INDIVIDUAL RETURNS

1040

1040EZ

1040A

REPORTS FILED WITH IRS

BASIC FORMULA FOR CALCULATING INCOME TAX Total Income

Less: Exclusions

Gross Income

Less: Deductions for Adjusted Gross Income

Adjusted Gross Income

Less: Itemized Deductions/Standard Deductions

Taxable income

Tax liability calculated per table

Less: Any credits or prepayments

Equals: Net tax payable or refunds

WHAT IS INCOME?

TOTAL INCOME

Any “income from whatever source derived.”

Includes both taxable and non-taxable income.

Does NOT include return of capital (basis) of property sold.

Example: Bob sells a piece of property for $1,000. He has

a cost basis of $700. Bob will include $300, not $1,000, in

total income.

GROSS INCOME ITEMS PER § 61

WagesBusiness Gross Inc.Gains from Property SalesInterestRentsRoyaltiesDividends

GROSS INCOME ITEMS PER § 61

Alimony through 12/31/2018AnnuitiesLife Insurance ProceedsPensionsCOD IncomePartnership IncomeIRDTrust/Estate Income

WHAT IS EXCLUDED?Gifts

Life Insurance

Welfare

Certain Scholarships

Certain Payments for Injury

Certain Employee Benefits

Certain Foreign Income

Tax-Exempt Interest

WHAT IS EXCLUDED?Series EE Bond Interest

Leasehold Improvements

Meritorious Achievement Awards

Certain Divorce Payments

Gain from Sale of Home

Roth IRA Distributions

COD

SS Benefits

CALCULATING TAXABLE SOCIAL SECURITY INCOME

DEDUCTIONS

“FOR” VS. “FROM” AGI

“FOR” (ABOVE THE LINE) DEDUCTIONS

DEDUCTIONS “FOR” AGI = § 62 (1 OF 2)

Trade and Business DeductionsReimbursed Employee ExpensesLoss from Property SalesRent/Royalty DeductionsRetirement Plan ContributionsPenalties from Savings AccountsOne-half Self-Employment Taxes

DEDUCTIONS “FOR” AGI = § 62 (2 OF 2)

Self-employed Health Insurance PremiumsAlimony for agreements executed prior to 2019Moving ExpensesRepayments of Unemployment CompensationCertain Jury Duty PayInterest on Student LoansMedical Savings Account Contributions

“Tax day is the day that ordinary Americans send

their money to Washington, D.C., and wealthy

Americans send their money to the Cayman

Islands.” – Jimmy Kimmel

“FROM” (BELOW THE LINE) DEDUCTIONS

Itemized Deductions Standard

Deduction

STANDARD DEDUCTIONS (2018 AMOUNTS)

Single = $12,000

Head of Household = $18,000

Married Filing Separately = $12,000

Married Filing Jointly = $24,000

Add $1,300 to the Standard Deduction ($2,600 if both

elderly AND blind). Max increase of $5,200 for MFJ.

ITEMIZED DEDUCTIONS

Medical Expenses

Taxes – Property, Real Estate, and State

Charitable Contributions

Mortgage Interest

ITEMIZED DEDUCTIONS – NOT SUBJECT TO THRESHOLDS

Mortgage Interest – limited to $750,000 mortgage Charitable Contributions – limited to 60% AGI.Property, State, and Real Estate Taxes – limited to $10,000 ($5,000 MFS).Investment Interest – limited to net investment income.

ITEMIZED DEDUCTIONS – NOT SUBJECT TO THRESHOLDS

Miscellaneous Deductions:

Estate taxes for Income in Respect of a Decedent.

Gambling losses to the extent of gambling

income.

Amortization of bond premium.

Amounts restored under claim of right.

ITEMIZED DEDUCTIONS – SUBJECT TO FLOORS

Medical Expenses – Can only deduct

amounts over 7.5% AGI.

ITEMIZED DEDUCTIONS Mortgage Interest

MEDICAL EXPENSES

Taxpayer can deduct certain medical expenses for any of the qualified individuals: Taxpayer’s dependents;

Children of divorced parents;

Taxpayer

QUALIFIED MEDICAL EXPENSES

DIAGNOSIS, CURE, MITIGATION, TREATMENT, OR PREVENTION OF DISEASE (1 OF 2)

Includes routine physicals or dental exams.Also permits expenses to cure a specific ailment but cannot be any expenditure to improve one’s general health (e.g., vacations).However, weight-loss programs prescribed by a physician to cure specific diagnoses, such as hypertension, diabetes, obesity may qualify as a deduction.

DIAGNOSIS, CURE, MITIGATION, TREATMENT, OR PREVENTION OF DISEASE (2 OF 2)

Medical treatment must be legal (e.g., not for controlled substances).Generally, non-prescription drugs, supplements, and health foods are not deductible.Special camps or schools for children with physical or learning differences may be deductible.

PROCEDURES AFFECTING FUNCTION OR STRUCTURE OF THE BODY

Expenses are deductible if it impacts function or structure of the body.Examples – Physical therapy, eyeglasses, hearing aids, dental exams, and cleanings.Cosmetic surgery is not deductible unless needed to correct deformity, personal injury, or disfiguring disease.

TRANSPORTATION ESSENTIAL TO MEDICAL CARE

Taxpayer can deduct actual expenses for automobile, taxis, airfare, and ambulance fees if travel is for medical reasons.Auto mileage = 18¢/mile (2018 rate).Meals are subject to 50% disallowance.§ 213(d)(2) limits lodging costs to $50/night.If patient must be accompanied, then taxpayer may deduct up to an additional $50/night lodging for companion.

QUALIFIED LONG-TERM CARECan deduct costs for long-term care as a medical expense subject to 7.5% AGI. Patient-taxpayer must be chronically ill.Can also deduct premiums, subject to certain limitations.“Chronically ill” = person cannot perform at least two of the following tasks for at least 90 days: Eating Toileting Bathing Dressing

CAPITAL EXPENDITURES FOR MEDICAL CAREGenerally, acquiring capital assets in rendering medical care are not deductible.Exceptions:

1. Items that relate to the sick person – e.g., eyeglasses, service animals, artificial limbs, wheelchairs. Deductible when paid.

2. Items that permanently improve or better the taxpayer’s residence – e.g., swimming pool to help heal patient’s arthritis. Can only deduct outlays > increased FMV.

3. Outlays to remove structural barriers in home of disabled person –e.g., installation of entrance ramps. Deductible when paid.

COST OF LIVING IN INSTITUTIONS

Cost of in-patient hospital or institutional care is deductible if the main reason the taxpayer is there is for medical care.Covered costs include meals, lodging, and other medical care rendered.Examples of qualified institutions – Hospitals, nursing home, school for the disabled.

AMOUNT AND TIMING OF DEDUCTION (1 OF 2)

Generally, taxpayer can deduct qualified expenses only in year paid, irrespective of whether cash or accrual method.Exceptions: Credit card payments – Deemed paid when charged.

Prepaid expenses are deductible only when services are rendered, unless prepayment is a requirement before receiving care.

AMOUNT AND TIMING OF DEDUCTION (2 OF 2)

Taxpayer can only deduct unreimbursed medical expenses.

Example: If taxpayer deducts $50,000 medical expenses in year 1 but in year 2 is reimbursed $20,000, taxpayer must recognize $20,000 in year 2.If taxpayer never deducted the $50,000, taxpayer does not need to recognize the $20,000.

“It is a good thing that we do not

get as much government as we pay

for.” – Will Rogers

ITEMIZED DEDUCTIONS Interest Expense

INTEREST EXPENSE – “FOR” VS. “FROM” AGI

HOME EQUITY LOANS

Generally, interest paid is deductible as long as loan is secured by qualified residence and used for improvements.

Debt is limited to lesser of:

FMV of residence in excess of acquisition indebtedness; OR

$100,000 ($50,000 MFS).

Taxpayer can deduct interest paid on up to $750,000 ($375,000 MJS) acquisition debt AND $100,000 ($50,000 MFS) home equity loan.

TAX CREDITS

USE AND IMPORTANCE OF TAX CREDITS (1 OF 2)

Refundable Personal Credits

Earned Income Credit

Overpayment of Social Security Taxes

Taxes withheld from wages and other income.

Premium Tax Credit

Nonrefundable Personal Credits

Adoption Credit

Child Tax Credit

Child and Dependent Care Credit

Elderly/Disabled Credit

Educational Credits

Retirement Savings Credit

Residential Energy Credit

TAX CREDIT FOR ELDERLY OR DISABLED

For individuals ≥ 65 years old and retired because of permanent and total disability.Credit = 15% of maximum amount.Max amount = $5,000 ($7,500 if MFJ and both spouses disabled).Max amount reduced by:

1.Non-taxable SS, VA, or RR retirement; AND2.½ of AGI in excess of $7,500 ($10,000 for MFJ).

SAVER’S CREDIT

Credit is from 10%-50% of contributions to a retirement account up to $2,000 contribution a year.Eligibility: 18 years old;

Cannot be claimed as a dependent by someone else; AND

Must not be a full-time student.

CHILD CREDITS – § 24

Can claim $2,000 credit for each qualifying child or $500 for each other dependent. Partially refundable.Qualifying child = same definition as for dependency exemption except < 17 years.Credit is reduced $50 for every $1,000 (or part thereof) over $200,000 ($400,000 MFJ).Partially refundable. Refund is limited to the lesser of: (1) 15% of the taxpayer’s earned income in excess of $2,500 or (2) $1,400 (if the taxpayer has one or two qualifying children).

CAPITAL GAINS AND LOSSES

TREATMENT OF CAPITAL GAINS/LOSSES (1 OF 2)

Capital gains and capital losses derive from sale or exchange of capital assets.Net long-term capital gains are taxed at a lower rate than Ordinary Income.

Net short-term capital gains are taxed as ordinary income.

TREATMENT OF CAPITAL GAINS/LOSSES (2 OF 2)

Capital assets are general trade, business, or investment property that are not inventory.Net capital losses are deductible only up to $3,000. Excess capital losses can be carried forward.

MAXIMUM NET CAPITAL GAIN RATES

Capital Gains can be taxed at the following maximum rates depending on the taxpayer’s AGI:

0% for AGI < $38,601 - single ($77,201 - MFJ). 15% for AGI > $38,600, but < $425,801 – single ($77,200/479,001 – MFJ).

20% for AGI > $425,800 – single ($479,000 – MFJ).

TAX PLANNING

TAX PLANNING CONSIDERATIONS

SALE OF PRINCIPAL RESIDENCE – § 121

Permits permanent exclusion of gain on sale of personal residence.Up to $250,000 (single) or $500,000 (MFJ) gain can be excluded if the § 121 requirements are met.“Residence” requirement met based on facts and circumstances.

REQUIREMENTS UNDER § 121

Sale or ExchangePersonal ResidenceUsed as personal residence 2 out of 5 years

2 OUT OF 5 YEARS TEST

Time residence owned by deceased spouse or ex-spouse counts toward the time requirement.Even if 2 out of 5 years test not met, some of the gain may still be excluded if sale due to certain unforeseen circumstances.

EXAMPLES OF UNFORESEEN CIRCUMSTANCES

GAIN EXCLUDED PER 2 OUT OF 5 EXCEPTION

GIFT TAXES AND ANNUAL EXEMPTIONS

TYPES OF WEALTH TRANSFER TAXES

GIFT TAX – GENERALLY

Taxes wealth transfers to others while the giver (“donor”) is still alive.Starting 2018, can transfer (through gift or estate) up to $11.2 million tax free (indexed for inflation). Wealth transfers over $11.2 million are taxed. Top marginal rate = 40%.Gift recipients incur no tax liability.

GIFT TAX ISSUES (2 OF 2)

Gifts to spouses and charities never taxable and can be unlimited. If gift to individual other than spouse, is it below the annual exclusion amount ($15,000 per donee in 2018)? Donor can make gifts below $15,000 in 2018 to an

unlimited number of individuals w/o paying gift tax. Gifts ≤ $15,000 are not included in tax base.

CALCULATING TAX BASE

DONOR ALIVE

GIFT TAX RULES APPLY AMOUNT FOR ESTATE ASSETS TO BE INCLUDED IN TAX BASE DISCUSSED IN CHAPTER 13.

ATG VALUED @ FMV ON DATE OF GIFT

IS FMV GIFT < YEARLY EXCLUSION AMOUNT PER DONEE (IN 2018 $15,000)

GIFT TAXES ASSESSED

DONOR DIES

ESTATE TAX LIABILITY CALCULATED ON TAX BASE IN 2018, TAX BASE < $11.2 M NOT TAXED

ANY ESTATE TAX LIABILITY REDUCED BY GIFT TAXES PREVIOUSLY PAID

EXCLUDE FROM TAX BASE

NO

NOYES

YES

ATG = ADJUSTED TAX GIFTSCOPYRIGHT ©2015 PEARSON EDUCATION, INC. 12- 69

OTHER TAXES

OTHER TAXES Alternative Minimum Tax

ALTERNATIVE MINIMUM TAX (“AMT”)

Ensures taxpayers pay a “fair” share of taxes irrespective of exclusions, deductions, and credits.Must calculate every year.Pay greater of “regular” tax or AMT.

AMT FORMULA (1 OF 2)

Regular Taxable Income or Loss+ Tax Preference Items+/− AMT Adjustment ItemsAlternative Minimum Taxable Income (“AMTI”)− Exemption for AMTTAX BASE

AMT FORMULA (2 OF 2)

Tax Base× AMT Tax RatesTentative Minimum Tax− Regular Income TaxALTERNATIVE MINIMUM TAX

TAX RATES AND EXEMPTIONS

2018 Rates 26% on first $191,500. 28% on AMTI over $191,500.

AMT Exemption Amount = Basic exemption amount – 25% (AMTI – threshold).

OTHER TAXES Taxes on the Wealthy

ADDITIONAL MEDICARE TAX

Additional tax = 0.9% x SE income if earned income exceeds thresholds.Thresholds: MFJ - $250,000

Single - $200,000

MFS - $125,000

ADDITIONAL TAX ON INVESTMENT INCOMEInvestment income are subject to an additional 3.8% tax for high income individuals.Applies if modified adjusted gross income is more than $200,000 (single)/$250,000 (MFJ).

TAX PAYMENTS

TAX PAYMENTS (1 OF 2)

TAX PAYMENTS (2 OF 2)

REQUIRED ESTIMATED TAX PAYMENTS – MUST ≥ ANY OF FOLLOWING:

“The taxpayer: that’s someone who

works for the federal government, but

doesn’t have to take a civil service

examination.” – Ronald Reagan

TEST YOUR KNOWLEDGE!

QUIZ QUESTION #1Jim and Joan have lived in Texas their entire lives and have been married for 40 years. They own Exxon Mobil stock worth $90,000, which they had bought many years ago for $10,000. They sell all of the stock in 2018. How much profit should they reflect on their 2018 tax return?

A. $90,000

B. $80,000

C. $10,000

D. None, since all of the money is being spent on their grandkids.

QUIZ QUESTION #2Assume the same facts as above, except that Joan passes away shortly before Jim sells the stock. How much in profit would Jim show on his tax return assuming the price it is sold for is about equal its value on the day Joan passes?A. $90,000B. $80,000C. $10,000D. $ 0

QUIZ QUESTION #3Leslie owns some Treasury bonds that pay her $2,000 of (coupon) interest every 6 months. Leslie has plenty of funds, and hates paying taxes, so she tells her broker to send the interest directly to her son, Joseph, instead. Who is responsible for paying taxes on the interest income?

A. Leslie

B. Joseph

C. No one as long as we don’t tell the IRS.

D. Both of them 50/50.

QUIZ QUESTION #4Jack owns a condo in Aspen which he uses as a vacation home. Jack’s daughter, Beth, often uses the condo along with her young family. Due to Jack’s health and the fact that Beth and her family stay many weeks at a time at he condo, Jack transfers ownership of the condo to Beth as a gift. Jack bought the condo for $100,000 many years ago. The fair market value of the condo is $250,000. What, if any, are the tax implications of the transfer?

A. None. There are no gift tax implications since Beth is Jack’s daughter.B. Jack with owe gift taxes on $250,000.

C. Jack will owe gift taxes on $235,000.

D. Jack will owe gift taxes on $100,000.

QUIZ QUESTION #5Same facts as above except Jack transfers the condo to his wife, Alice. Assume when Jack initially bought the condo, he was single at the time. What are the gift tax implications, if any. A. Jack with owe gift taxes on $250,000.B. Jack will owe gift taxes on $235,000.C. Jack will owe gift taxes on $100,000.D. None. There are no gift tax implications on transfers between spouses.

QUIZ QUESTION #6Don and Alice have a grandson, Benny, who is undergoing medical treatment that is expected to cause $70,000 in out-of-pocket expenses. They want to pay for these treatments to help out the family. Which of the scenarios will allow Don and Alice avoid paying gift tax for amounts over the $15,000 exemption?

A. Pay the $50,000 directly to Benny’s parents.

B. Pay the hospitals and doctors directly.

C. Put it in an account in Benny’s name.

D. None of the above.

QUIZ QUESTION #7Susan’s spouse, Steve, became very ill during 2018. Their grown daughter, Janie, quit her job to come home during early 2018 to help. Janie lived with Susan and Steve in order to be on hand, and they in return paid all of Janie’s expenses. Steve passes away on December 30, 2018. What is Susan’s filing status for 2018?

A. Single

B. Married Filing Jointly

C. Married Filing Separately

D. Head of Household

E. Any of the above would be fine.

QUIZ QUESTION #8Assume the same facts as in Question #6. What is Susan’s filing status in 2019 assuming Janie: a) is still living with Susan; b) is not earning any income; and c) opts not to file a return?A. SingleB. Married Filing JointlyC. Married Filing SeparatelyD. Head of HouseholdE. Any of the above would be fine.

QUIZ QUESTION #9Mark and Allison have amassed a Section 529 plan worth $100,000 for their grandson, Robby. Mark and Allison initially deposited a total of $40,000 over a period of years starting from when he was an infant. Robby turns out to be a brilliant student with perfect SAT and ACT scores. He is awarded a full room, board and tuition scholarship to UNT. Mark and Allison do not have any other relatives to whom to transfer the college fund. What will be the tax impact should they withdraw all the funds?

A. They will owe tax on $100,000 of income.

B. They will owe tax on $60,000 of income.

C. They will owe no tax on the withdrawn money.

D. Who cares? They now can go on a world cruise!

QUALIFIED TUITION PROGRAMS – OTHER ISSUESOwner of account can change beneficiaries without tax impact. Beneficiaries must be a member of original beneficiaries’ family.

Education credits reduce any exclusion under § 529.Payors can make a large gift into the plans and can treat it as having paid over 5 years (makes it possible to go below the $15,000 per person threshold for tax-free gifts).

QUESTION #10Bruce and Michelle, a married couple, bought a house in Robson Ranch for $300,000 18 months ago. This house is considered their main residence. Because of skyrocketing Denton County property prices and the fact that oil and gas reserves were found under the house, the property is now worth $800,000. What would be the best time to sell the property from a tax standpoint, all things being equal?A. Wait six months.B. Wait, why wait?!?! They should take the money and run!C. Sell it immediately.D. It does not matter when they sell it for tax purposes.

QUESTION #11Jeffrey is assessed about $13,000 of property taxes on his home. How much can he deduct assuming he itemizes his deductions on Schedule A?

A. $13,000

B. $10,000

C. None

D. He should be able to deduct more than $13,000 since his house has foundation problems.

QUESTION #12Beth withdraws $25,000 from a traditional Individual Retirement Account (“IRA”) which holds funds that were originally from her job’s Section 401(k) plan. There was $100,000 prior to the withdrawal. Assume that $10,000 of the $100,000 consists of after-tax contributions. Also assume that Beth is over 59 ½ years old. How much of the distribution is taxable?

A. $25,000.

B. $0, since it is coming from an IRA.

C. $22,500

D. None of the above.

QUESTION #13Assume the same facts as above, except that the money comes from a Roth IRA. How much of the distribution is taxable. A. $25,000.B. $0, since it is coming from a Roth IRAC. $22,500D. None of the above.

QUESTION #14David inherits a Nolan Ryan rookie card from his great uncle, who paid less than $1 for it many years ago. It is now worth in excess of $1 million. How much is considered taxable income?

A. $1 million

B. $1

C. $0, since gifts are not taxable to the recipient.

D. None of the above, since you cannot put a price on a Nolan Ryan card.

QUESTION #15Tessa’s aunt passes away and had designated Tessa as the beneficiary of her life insurance policy. Tessa receives a check for $50,000 from the insurance company. How much of these proceeds are taxable?

A. $50,000

B. $50,000, less the amounts the aunt paid as premiums

C. $0

D. None of the above.

QUESTION #16A group of ten friends at Robson Ranch get together and pool their money monthly for lottery tickets. One week, they hit it big and win $3 million. Assuming the cost of the tickets was de minimus and each person is allocated $300,000 in proceeds, how much of the winnings is taxable?

A. $300,000, per person.

B. $300,000 less the cost of the big party they had following the win.

C. $ 0 since that is what will be left after distant relatives show up.

D. $0, since lottery winnings are not taxable.

“When it comes to taxes, there are two types of

people. There are those that get it done early,

also known as psychopaths, and then the rest of

us.” – Jimmy Kimmel

CONTACT US!

Allison M. McLeod, LL.M., CPAA Professional Limited Liability Company

A_m_mcleod@yahoo.com214.403.8622