Do you help your aging parents with their finances and taxes? Are you taking advantage of all the qualified medical tax deduction opportunities for their situation?
Some good questions to ask yourself and your parents are:
Did you parents enter a Continuing Care Retirement Community this year? Was the entrance fee or apartment cost non-refundable? If that is the case contact the facility your parents are living in to find out how much of the entrance fee is tax deductible. The deduction usually ranges from 30% to 40% of the cost of the apartment\entrance fee.
In addition to the non-refundable apartment or entrance fees, a portion of the monthly fee is most likely tax deductible. Is this just a quirk in the tax code? No, it is just the government’s way of recognizing a portion of these payments really represent the cost of future health care costs. These deductions will most likely exceed the floor of medical deductions of 7.5% for your parent’s situation. Again, contact the facility to find out the deduction amount.
Or do your parents have a large amount of medical expenses in 2016? The IRS allows you to deduct qualified medical expenses as an itemized deduction at age 65 or older if they exceed 7.5% of your adjusted gross income in 2016. In 2017, they must exceed 10% of AGI. With a $50,000 income with $7,500 in medical bills, a parent could deduct $3,750 with this deduction.
If this deduction is larger, consider using the deduction to convert your parent’s regular IRA to a Roth. Let’s say we have a year when a parent has $50,000 of medical bills which results in a negative income of $15,000. In working with the parent’s accountant the parent can use this negative income to roll $15,000 from the traditional IRA to a Roth without paying tax. In this scenario, we are moving money out of an IRA where distributions are taxed at ordinary income rates to a Roth where distributions are not taxed on withdrawal. This Roth may eventually be passed to you for tax free withdrawals.
So as you work on that 2016 tax return this year, take a close look at your parent’s medical expenses.
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Peter B. Smith is a Family Wealth Advisor at the Planning Solutions Group in Fulton, MD (firstname.lastname@example.org) and is an Annapolis resident. He can be reached at 301-543-6008 or by email at email@example.com. Peter Smith is not a CPA, this is not tax advice. Please consult your tax advisor for more information.