Legal Disclaimer
The information contained in this program is provided as a public service and does not constitute solicitation or provision of legal advice. The information presented is prepared for a general audience, without investigation into the facts of each particular case. The listener/reader is advised to consult with a qualified attorney on any legal issue. This program does not create an attorney-client relationship with any of its listeners and calling in to the host does not create an attorney-client relationship. Legal advice must be tailored to the specific circumstances of each case, so nothing provided in this presentation should be used as a substitute for the advice of competent counsel.
Filing Deadlines
Form 1040
Individual Form 1040 tax returns will be due on April 15, 2019. Taxpayers may request an automatic 6 month extension to file their returns; however, any tax that may be due must still be paid by April 15, 2019. Taxpayers will owe late payment penalties and interest on payment made after this date.
Tax Reform Changes
Medical Deductions
As a result of the recent tax reform, taxpayers may write off medical expenses that exceed 7.5% of their adjusted gross income for 2018. Starting in 2019, the threshold increases to 10% of adjusted gross income.
Standard Deduction
The standard deduction for 2018 has essentially been doubled at each filing status. A single taxpayer now has a $12,000 standard deduction and a married couple filing jointly has a $24,000 standard deduction. However, the personal exemption has been eliminated. What this means is that fewer taxpayers will itemize because their total deductions will not exceed the standard deduction. Taxpayers with significant medical expenses, property taxes, mortgage interest, charitable deductions should still keep their receipts.
For Colorado residents, even if you will not itemize your federal tax deductions, you should still report your charitable contributions. Colorado gives taxpayers a credit toward their state income taxes for charitable contributions totaling more than $500. Other states may have similar credits, so be sure to discuss your charitable contributions with your tax preparer.
Tax Rates
The federal tax rates have decreased at all income levels. Most tax rates have dropped roughly 3% at each tax bracket. Taxpayers with lower income will see a slight decrease in their tax liability, while taxpayers with higher income should see a more significant decrease.
| Single Taxpayer | Married Filing Jointly | Trusts & Estates | Ordinary Income Tax Rates |
| $0-$9,525 | $0-$19,050 | $0-$2,550 | 10% |
| $9,526-$38,700 | $19,051-$77,400 | 12% | |
| $38,701-$82,500 | $77,401-$165,000 | 22% | |
| $82,501-$157,500 | $165,001-$315,000 | $2,551-$9,150 | 24% |
| $157,501-$200,000 | $315,001-$400,000 | 32% | |
| $200,001-$500,000 | $400,001-$600,000 | $9,151-$12,500 | 35% |
| $500,001+ | $600,001+ | $12,501+ | 37% |
Filing Returns and Communicating with the IRS
Does my parent need to file income tax returns?
While it’s always a good idea to file annually regardless of income, if a taxpayer’s only source of income is social security or the taxpayer has no income at all, then they do not have a filing requirement. If your parent does need to file a tax return, there are many tax preparation sites sponsored by the IRS around Denver that will prepare tax returns for free. During tax season, you can call 211 and ask for a list of the VITA sites near you. Special AARP sites may also be available which specialize in income sources common for seniors.
Can I file a return or talk to the IRS on my parent’s behalf?
In order to file taxes on your parent’s behalf, you need a power of attorney naming you as the taxpayer’s agent. The power of attorney document needs to specifically grant you the power to file taxes. It cannot be a general one page power of attorney that grants the agent any and every power. In addition, if you ever want to talk to the IRS on behalf of your parent, you’ll need to complete the IRS’ specific power of attorney Form 2848 and a notice of fiduciary relationship, Form 56.
Common Types of Income for Seniors
Social Security
If you or your parent receives social security, an annual statement will be mailed summarizing the benefits paid during 2018. This document should be provided to your income tax preparer. The document usually has a pink border and should not be confused with a similar document which simply contains your expected payments for 2019.
Pensions and IRAs
If you or your parent receives pension payments or withdrew monies from an IRA or 401(k), the financial institution managing the account will mail a 1099-R in February. These documents should be provided to your income tax preparer who can calculate the taxable portion of these payments.
If you or your parent are over 70 1/2 years of age, one of your most important tasks is withdrawing your annual required minimum distribution (RMD) by December 31st. If you failed to withdraw your RMD, you can be assessed a 50% penalty of the amount you failed to withdraw. These are significant penalties and should not be ignored. The estate of a deceased taxpayer should also check to be sure the decedent withdrew his or her RMD for the year. The estate can be subject to the same 50% penalty if the RMD is not withdrawn. A penalty waiver request can be submitted with your tax return, so be sure to discuss this with your tax preparer if you forgot to withdraw your entire RMD by the end of 2018.
Investments
If you or your parent owns an investment account containing stocks, bonds or mutual funds, the financial institution managing the account will mail you documents in late February or early March. These documents may include 1099-INT, 1099-DIV, or 1099-B. The forms report the total Interest and Dividends earned by your account. If you sold any assets during the year, those sales are reported on the 1099-B. CAUTION: These forms are frequently amended by the financial institution. If significant changes are made after you have already filed your income tax return, you may need to amend your return to report the changes.
MISCONCEPTTION: Not every tax document has to be mailed by the end of January. The January deadline only applied to W-2s for wage employees.
Sale of a House
Tax Consequences to Selling a House
If you or your parent sold a house during 2018, you will likely receive a 1099-S from the title company. If the home appreciated in value since it was purchased, there will be gain on the sale of the home which may be subject to income tax. The seller may exclude up to $250,000 of this gain if they lived in and owned their home for at least two of the past five years. Joint filers can exclude $500,000 of gain from the sale of their home.
If you or your parent has not yet sold the home but has already moved out, plan on selling the home within three years of the date of moved out. If the home is sold after this date, the owner loses out on the $250,000 tax exclusion. Additionally, if the owner’s spouse died within the past two years, the survivor may still use the full $500,000 exclusion. In Denver’s real estate market, it is not uncommon to find houses purchased for $50,000 back in the 1970s which are now sold for $500,000-$600,000. The income tax on this gain can be significant.
Caution: To claim the exclusion, the original owner must be the named seller. Do not transfer the house to the children first and then sell the home. The exclusion will be lost altogether.
Consequences to Gifting a House
Parents often add children to the title of their house for administrative ease. From a tax perspective, this is a mistake. First, by transferring title to a child, the $250,000 gain exclusion is lost because the child has not lived in the house for two of the past five years. Second, the child takes the parent’s tax basis which means when the child sells the house, they will compare the sale price to the parent’s original purchase price to calculate the taxable gain. Third, anytime a gift over $15,000 is made in a single year, the donor must file a gift tax return. Many times, parents forget to file this return when they add a child to the title of the house or sign a quit claim deed. Lastly, a very important non-tax reason to avoid transfers to children is that the transfer puts the house at risk if your child has creditors or ends up in a divorce. If the parent still lives in the house, they are putting their living situation at risk. There are alternatives other than adding a child to the deed to make administration of the home easier.
Why Not to Sell the House
If your parent doesn’t need the money, it may be wise to keep the house until after your parent passes away. From a tax perspective, when a person dies, the tax basis of that person’s assets is adjusted to the fair market value as of their date of death. For example, if your dad purchased his house for $50,000 and now it’s worth $500,000, he has $450,000 of gain while he’s alive. After he passes away, the new tax basis of the home is the current fair market value of $500,000. The family can then sell the house after his death for $500,000 at zero gain.
This is yet another reason not to transfer a house to a child shortly before a death. In the child’s hands, the house receives no basis adjustment when the parent dies. This rule is true for the parent’s other assets as well such as stocks and bonds which may have been purchased years ago. It is almost always better for a parent to pass away with an asset in his or her own name than to give it away shortly before death.
There are certainly many non-tax driven reasons to sell and not sell a house. And those reasons may outweigh these tax reasons. It is always a good idea to fully research and discuss the pros and cons of transferring a house before your parent signs a deed.
Income Tax Deductions
Assisted Living
The cost of assisted living is deductible if a principal reason for being in assisted living is to get medical care. If a patient with Alzheimer’s needs to be supervised, then the housing and medical care costs are deductible. If a parent simply wants to live in a community where they have meals prepared for them and they happen to receive some medical care, then only the medical care is deductible and not the room and board.
If a nurse or home healthcare worker assists your parent with dressing, bathing, or taking medications in your home or your parent’s home, those wages are deductible medical expenses. If the assistant also performs household chores, that portion of their wage is not deductible.
You may only deduct out of pocket expenses—not expenses paid for or reimbursed by insurance. If your parent is paying these expenses, then your parent would deduct them on their tax return. A child may deduct assisted living and medical expenses that they pay these expenses for their parent so long as the child pays over half the parent’s annual support. The parent does not have to qualify as the child’s dependent (see below) for these medical deductions.
Adult Day Programs
Day programs for adults may be deductible as medical expenses if the adult is considered disabled. If the adult attends the day program so that their primary caregiver i.e. child or spouse, can go to work, the caregiver may alternatively be eligible for the Dependent Care Credit. The taxpayer may only claim one or the other, so always discuss which option makes better sense for your situation with your tax preparer.
Dependent Deductions
You may claim your parent as a dependent on your own income tax return if you meet five tests:
- The parent must be related to you i.e. your parent, step-parent, in-law.
- The parent must be a U.S. Citizen or resident or Canada or Mexico.
- The parent may not file a joint tax return unless it is solely to obtain a refund.
- The parent cannot have gross income > $4,050 (for 2016). This sum does not include tax exempt income or social security.
- You must provide over half your parent’s support i.e. rent, food, clothing, or you must provide 10% of the support with other family members providing the other 40% of support.
**Parent does not actually have to live with you to meet all of these factors.
If you file as single or married filing separately and you pay over half the expenses for your parent, you may also be eligible to use the head of household filing status which can help if you use the standard deduction.
Need Help or Have Questions? Call me! Klaralee Charlton (303) 832-1900. I’m happy to discuss your tax situation over the phone or in person to ensure the best result based on your unique circumstances. \l
