Life Events with Tax Consequences for Older Adults

When was I just beginning my newspaper career, filing taxes was EZ.

With no dependents (except a cat) or deductions (didn’t need a loan to go to college then), I spent the days leading up to April 15 soaking up spring and not digging through receipts. On more than one occasion, I was assigned to interview last-minute, and usually older, taxpayers in line at the U.S. Post Office. You would have thought they had just run a marathon.

Now, I get it.

As we grow older, all aspects of life, including financial, become more complicated and complex. Filing taxes is no exception. But replacing 1040EZ with multiple tax forms could turn out to be a boon to your bank account. Many older adults can take advantage of tax benefits and life events that reduce taxes and save money.

Downsizing and Selling the Family House

With children grown and more travel and leisure activities on the horizon, many older adults prefer living in a smaller home, such as an apartment, condominium or life plan community.

And, depending on how long you have lived in the family house and where it is located, you may earn a large profit on the sale.

According to IRS Publication 523, you can generally exclude up to $250,000 ($500,000 on a joint return) of the gain on the sale of your main home. To claim the tax exclusion, during the five-year period ending on the date of the sale, you must have:

• Owned the house for at least two years;
• Lived in the home as your main home for at least two years;
• During the two-year period ending on the date of the sale, not excluding gain from the sale of another home.

Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return unless you receive a form 1099-S from your real estate broker.

But make sure your “gain” is accurate. Attorney Stephen Fishman explains:

“Many people mistakenly believe that their gain is simply the profit on the sale (‘We bought it for $100,000 and sold it for $650,000, so that's a $550,000 gain, and we're $50,000 over the exclusion, right?’). It's not so simple—a good thing, since the fine print can work to your benefit in such instances.

"Your gain is actually your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments.)"

"So, for example, if you and your spouse bought a house for $100,000 and sold for $650,000, but you'd added $20,000 in home improvements, spent $5,000 fixing the place up for the sale, and paid the real estate brokers at least $25,000, the exclusion plus those costs would mean you'd owe no capital gains tax at all.”

A caveat: Make sure you have records to prove home improvements and the like.

When Your New Home Is a CCRC

Most Continuing Care Retirement Communities, such as Kendal at Oberlin, require a one-time entrance fee and ongoing monthly fees in exchange for certain future medical and lifelong care services.

Residents who itemize their taxes may reap tax benefits by being able to deduct a portion of those fees as medical expenses, according to Brad Breeding, president and co-founder of My LifeSite.

Breeding cites a 2012 document: “Portions of entrance fees and monthly fees paid by independent living residents of a CCRC or other ‘lifetime care facility’ are deductible to the extent that they represent a charge or pre-payment for future assisted living or skilled nursing care.”

The exact percentage of fees that are tax deductible varies from CCRC to CCRC, according to ElderLawNet. “The amount doesn't depend on the health care services that an individual resident actually received—it is the aggregate for the entire community. The CCRC is responsible for informing residents the percentage of its fees that are for medical costs,” the site explains.

Consult with your tax advisor or an attorney who specializes in elder law to see if you might be able to deduct these prepaid medical costs.

Speaking of Medical Expenses

The amount of money older adults spend annually on medical and dental expenses certainly adds up. But depending on your age and the amount, it may add up to a tax deduction.

If neither you nor your spouse is 65 years of age or older, you can only deduct medical expenses that exceed 10 percent of your adjusted gross income. If at least one taxpayer is 65 or older, the threshold is only 7.5 percent. However, starting in tax year 2017, the income threshold for the medical expense deduction increases to 10 percent for everyone.

The IRS defines deductible medical care expenses as “payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.”

Some deductions include:

• Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for a guide dog or other service animal that assists a visually impaired or hearing disabled person, or a person with other physical disabilities;
• Payments for transportation primarily for and essential to medical care services that qualify as medical expenses. This may include payments of the actual fare for a taxi, bus, train, ambulance, or for transportation by personal car, the amount of your actual out-of-pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking
• Payments for insurance premiums you paid for policies that cover medical care or for a qualified long-term care insurance policy covering qualified long-term care services.

Nondeductible expenses include cosmetic surgery and health club membership.

The Death of a Spouse

The loss of a spouse can impact all aspects of your life, from daily routine to financial security. The widow or widower might seek guidance, whether from a support group or financial planner, to help adjust to many changes.

The first year after a spouse’s death is often the most difficult with so many changes, but thankfully filing tax returns remains the same.

“In the year of the spouse’s death, the survivor is considered by the IRS to have still been married. Regardless of if the spouse dies on January 1 or December 31, the survivor can file as Married Filing Jointly or Married Filing Separate on the income tax return,” explains certified financial planner Jason Hull.

Why 70 ½ is a Milestone Age

“Every good thing must come to an end…even tax deferral,” the investment company Vanguard notes in explaining RMD – Required Minimum Distributions.

Three key points to remember, according to Vanguard:

1. Once you hit age 70 ½, the IRS requires you to start withdrawing from—and paying taxes on—most types of tax-advantaged retirement accounts;
2. You'll also need to take RMDs from any retirement accounts you inherit;
3. In most cases, RMDs are treated as ordinary income for tax purposes.

The distribution is based on your account balance and life expectancy. Many investment companies can calculate your RMD, or check out this online tool provided by Vanguard.

To reduce your taxes, you can donate all or part of your RMD to a qualified charity. The amount of the distribution will not be included in your adjusted gross income, which means that it will not be taxed by the state or the federal government.

To make such a donation, tell the custodian of the account to send the withdrawal to the charity or your choice. Charitable organizations, unlike beneficiaries, do not need to pay income tax on withdrawals from traditional IRAs.

Molly Kavanaugh frequently wrote about Kendal at Oberlin for the Cleveland Plain Dealer, where she was a reporter for 16 years.