OHIO ELDER LAW BLAWG

Medicare part B health premiums deductable in some circumstances

Sole proprietors, partners, LLC members, and S corporation employee-owners can deduct qualified health insurance premiums paid to cover themselves and family members. In order to qualify, the owner must own over 2% of the stock in the business. The health insurance costs can be deducted on a 1040 "above the line"  meaning that the deduction can be taken whether or not you itemize. ("The line" refers to the last line on the first page of the 1040 which indicates your adjusted gross income).

Medicare Part B premiums have not been a deductable qualified health insurance premium for the self-employed. Small business owners who were enrolled in Part B Medicare were unable to deduct from between about $1,100 to $4,500 a year (the amount paid depends on the income level of the Medicare beneficiary).   However the IRS recently reversed itself on the Medicare Part B premium deductability, as the 2010 instructions explicitly Medicare Part B premiums to be included in health insurance costs for the deduction.

A person can also deduct self-employed health insurance premiums from self-employment income when calculating self-employment taxes in 2010. Review these rules for 2011 returns, as they may expire after 2010. 

 

Estate and Gift taxes: A New World

The new tax cut extension package signed into law on December 17, 2010 by President Obama, establishes a new estate and gift tax regime for 2011 and 2012. After that, we are back in the land of uncertainty with regard to Estate Taxes.  Despite this, it is hard to withdraw rights once established, so it seems to me that it is unlikely that we will see an estate tax wtih lower exemption amounts, or higher rates. Additionally, the new law gives those who survive people who died in 2010 some options in election of how they would like to pay tax on their inheritance.

Below is an overview of the provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed by President Obama.

Exemption and Tax Rate

For this and next year the federal estate tax exemption is $5 million with a tax rate of 35 percent. There is a possibility that there may be an inflation adjustment for 2012, based on the rate of inflation.

A-B Trust Planning may not be necessary any longer for the Fed. Estate Taxes

Any unused federal estate tax exemptions for those who die in 2011 or 2012 are transferable to a surviving spouse.This means that the exemption would effectively be 10 million for a couple without a trust agreement. 

Where a first spouse to die leaves  everything to the surviving spouse, the surviving spouse will have two $5 million exemptions to work with, for a total of $10 million.

The surviving spouse can then leave up to $10 million to beneficiaries without any federal estate tax bill.

Inherited Capital-Gains

For beneficiaries of persons dying in 2011, assets will have a step up in tax basis to the date of death.  For decedents who died in 2010, the law was replaced by a modified carryover basis rule which limited the maximum step up in basis to $1.3 million plus $3 million for assets inherited by a surviving spouse.

Because of the unlimited basis step-up rule in effect this and next year, heirs will not have to pay federal capital gains taxes on the appreciation of property occuring through the date of death (if after 2010).

Estate and Gift Tax Rules Are Now the Same

This was a confusing area of the law, which has been made somewhat easier under the new provisions. The new law puts the lifetime federal gift tax exemption at $5 million, up from 1 million. It is easier because the gift tax exemption is equal to the estate tax exemption. The tax rates are now both 35%.  Now a person can give away up to $5 million in 2011 and 2012 while still alive without owing any gift tax ($10 million for a couple) during life.  To the extent you make gifts that utilize part of your $5 million federal gift tax exemption, your $5 million federal estate tax exemption is reduced dollar-for-dollar.  You are still permitted to give $13,000 per year per person away with no effect on your lifetime 5 million dollar exemption.

Estate Taxes in Ohio

Ohio is one of a few states wtih an estate tax that is not linked to the federal estate tax.  However, Ohio's new Governor is prepared to repeal the Ohio estate tax.  This tax mostly benefits local communities, and will be a burden on those communities as local governments struggle to find funds to operate. 

We will be following developments on the Ohio estate tax as they occur.

 

Global Aging is Changing Rules of Retirement

The entire world, not just the US, is seeing a revolution in the way we are spending retirment years, including not retiring at all.  The reasons can be because of personal choice, as well as necessity.  The Christian Science Monitor surveys this issue in an article published today.

Article

Retirement plans: What are the hidden fees? Thanks to new legislation, you will know soon.

Starting in 2012, participants in 401(k)  and 403(b) retirement plans will finally see how much they are paying in fees.  Hopefully this should help us make better investment choices and put some pressure on employers to improve high-cost plans.  Final rules issued Thursday by the Labor Department require employers to disclose fees and investment performance in a standard, consumer-friendly format.  The new rules will take effect more than 30 years after 401(k) plans were introduced in 1981. 

"These are absolutely necessary and useful, and a long time in coming," says Rick Meigs, president of 401khelp center.com.  Proponents of fee disclosure had to overcome intense lobbying "on the part of vested interests: brokers, insurance companies, people who take compensation" from 401(k) plans.  On of the factors helpint to turn the tide was a series of class-action lawsuits filed against large companies alleging that they violated their fiduciary duty under federal law by allowing employees to be charged excessive, undisclosed fees in their retirement plans.