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Paying for day care is one of the biggest expenses faced by working adults with young children, a dependent parent, or a child with a disability, but there is a tax credit available to help working caregivers defray the costs of day care (called “adult day care” in the case of the elderly).

In order to qualify for the tax credit, you must have a dependent who cannot be left alone and who has lived with you for more than half the year. Qualifying dependents may be the following:

• A child who is under age 13 when the care is provided
• A spouse who is physically or mentally incapable of self-care 
• An individual who is physically or mentally incapable of self-care and either is your dependent or could have been your dependent except that his or her income is too high ($4,150 or more) or he or she files a joint return.

Even though you can no longer receive a deduction for claiming a parent (or child) as a dependent, you can still receive this tax credit if your parent (or other relative) qualifies as a dependent. This means you must provide more than half of their support for the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Even if you do not pay more than half your parent’s total support for the year, you may still be able to claim your parent as a dependent if you pay more than 10 percent of your parent’s support for the year, and, with others, collectively contribute to more than half of your parent’s support. 

The total expenses you can use to calculate the credit is $3,000 for one child or dependent or up to $6,000 for two or more children or dependents. So if you spent $10,000 on care, you can only use $3,000 of it toward the credit. Once you know your work-related day care expenses, to calculate the credit, you need to multiply the expenses by a percentage of between 20 and 35, depending on your income. (A chart giving the percentage rates is in IRS Publication 503.) For example, if you earn $15,000 or less and have the maximum $3,000 eligible for the credit, to figure out your credit you multiply $3,000 by 35 percent. If you earn $43,000 or more, you multiply $3,000 by 20 percent. (A tax credit is directly subtracted from the tax you owe, in contrast to a tax deduction, which decreases your taxable income.)

The care can be provided in or out of the home, by an individual or by a licensed care center, but the care provider cannot be a spouse, dependent, or the child’s parent. The main purpose of the care must be the dependent’s well-being and protection, and expenses for care should not include amounts you pay for food, lodging, clothing, education, and entertainment. 

To get the credit, you must report the name, address, and either the care provider’s Social Security number or employer identification number on the tax return. To find out if you are eligible to claim the credit, click here.

For more information about the credit from the IRS, click here and here. 
 

Many people think that estate plans are for someone else, not them. They may rationalize that they are too young or don’t have enough money to reap the tax benefits of a plan. But as the following list makes clear, estate planning is for everyone, regardless of age or net worth.

1. Loss of capacity. What if you become incompetent and unable to manage your own affairs? Without a plan the courts will select the person to manage your affairs. With a plan, you pick that person through a power of attorney.

2. Minor children. Who will raise your children if you die? Without a plan, a court will make that decision. With a plan, you are able to nominate the guardian of your choice.

3. Dying without a will. Who will inherit your assets? Without a plan, your assets pass to your heirs according to your state’s laws of intestacy (dying without a will). Your family members (and perhaps not the ones you would choose) will receive your assets without benefit of your direction or of trust protection. With a plan, you decide who gets your assets, and when and how they receive them.

4. Blended families. What if your family is the result of multiple marriages? Without a plan, children from different marriages may not be treated as you would wish. With a plan, you determine what goes to your current spouse and to the children from a prior marriage or marriages.

5. Children with special needs. Without a plan, a child with special needs risks being disqualified from receiving Medicaid or SSI benefits, and may have to use his or her inheritance to pay for care. With a plan, you can set up a supplemental needs trust that will allow the child to remain eligible for government benefits while using the trust assets to pay for non-covered expenses.

6. Keeping assets in the family. Would you prefer that your assets stay in your own family? Without a plan, your child’s spouse may wind up with your money if your child passes away prematurely. If your child divorces his or her current spouse, half of your assets could go to the spouse. With a plan, you can set up a trust that ensures that your assets will stay in your family and, for example, pass to your grandchildren.

7. Financial security. Will your spouse and children be able to survive financially? Without a plan and the income replacement provided by life insurance, your family may be unable to maintain its current living standard. With a plan, life insurance can mean that your family will enjoy financial security.

8. Retirement accounts. Do you have an IRA or similar retirement account? Without a plan, your designated beneficiary for the retirement account funds may not reflect your current wishes and may result in burdensome tax consequences for your heirs. With a plan, you can choose the optimal beneficiary.

9. Business ownership. Do you own a business? Without a plan, you don’t name a successor, thus risking that your family could lose control of the business. With a plan, you choose who will own and control the business after you are gone.

10. Avoiding probate. Without a plan, your estate may be subject to delays and excess fees (depending on the state), and your assets will be a matter of public record. With a plan, you can structure things so that probate can be avoided entirely.

Contact Marsala Law Firm to discuss your estate plan.

[This article was originally published on December 20, 2012.  The links were updated on July 12, 2018.]

This type of account, named for Section 529 of the Internal Revenue Code, enables you to reduce your taxable estate while earmarking funds for the higher education of a grandchild (or any other family member). Funds contributed to such accounts are invested to pay for a grandchild’s college tuition, room and board, or other expenses. The account funds are usually invested in mutual funds, and earnings from these accounts are tax-free. (Prepaid 529 plans are an alternative to traditional investment 529 accounts; for more on these, click here.)

You can contribute up to $15,000 (in 2019) per year ($30,000 for a couple) to 529 accounts without incurring a gift tax. Or, if you prefer, you can contribute up to $75,000 ($150,000 for a married couple) in the first year of a five-year period, as long as there are no additional gifts to that same beneficiary over the five years. In other words, 529 accounts can be a quick way of getting a sizable amount of money out of your taxable estate (although if you die within the five-year period, the portion of the contribution allocated to the years following your death would be included in your estate). An added benefit is that donors to these accounts can take the money back later if needed, although they pay a penalty of 10 percent of earnings. However, this power to control the assets means that the savings in a 529 account will be counted as an available asset under Medicaid rules in the event the account holder requires long-term care.   

If the grandchild uses the funds for any purpose other than higher education, the earnings are taxed as ordinary income to the account owner (you) and a 10 percent penalty is assessed on investment gains. Since you are the account owner, such accounts generally do not affect a child’s eligibility for financial aid. This change may increase a student’s chances for financial aid since qualified withdrawals will no longer be considered income to the student. Moreover, you can change beneficiaries at any time, as long as the new beneficiary is a member of the original beneficiary’s family. (The tax law enacted in 2001 expanded the list of family members to include the first cousin of the original beneficiary.) Most states now permit or are planning to permit 529 account plans, and many investment firms now offer them as tax- and estate-planning vehicles for their clients.

The Web site www.savingforcollege.com can help you compare the many state plans. In addition, click here for a good guide to choosing a 529 plan.

A recent case involving basketball star Caldwell Jones demonstrates the danger in having only one spouse’s name on a reverse mortgage. A federal appeals court has ruled that an insurance company may foreclose on a reverse mortgage after the death of the borrower, Mr. Jones, even though Mr. Jones’ widow is still living in the house. While there are protections in place for non-borrowing spouses, many spouses are still facing foreclosure and eviction.

A reverse mortgage allows homeowners to use the equity in their home to take out a loan, but borrowers must be 62 years or older to qualify for this type of mortgage. If one spouse is under age 62, the younger spouse has to be left off the loan in order for the couple to qualify for a reverse mortgage. Some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way. But couples often did this without realizing the potentially catastrophic implications. If only one spouse’s name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.

In order to protect non-borrowing spouses, the federal government revised its guidelines for reverse mortgages taken out after August 4, 2014 to allow spouses to stay in the house as long as they meet certain criteria, including proving ownership within 90 days of the borrowers death. In 2015, the federal government allowed lenders to defer foreclosure on a widow or widower and assign the mortgage to the federal government. Advocacy groups looking at reverse mortgage foreclosures have found that despite these new regulations, lenders are still foreclosing on non-borrowing spouses. Of the 591 non-borrowing spouses who have sought help to avoid foreclosure, only 317 received assistance.

These regulations did not help Mr. Jones’ wife, Vanessa. Mr. Jones, who blocked more than 2,200 shots during his 17-year professional basketball career, obtained a reverse mortgage in 2014 on the Georgia home he lived in with his wife. The contract defined the “borrower” to be “Caldwell Jones, Jr., a married man.” Ms. Jones did not put her name on the reverse mortgage because she was under age 62 at the time of the mortgage. Mr. Jones died later that year, and when Ms. Jones did not repay the loan, the insurer began foreclosure proceedings.

Ms. Jones sued the insurer in federal court to prevent the foreclosure, arguing that federal law prohibited the insurer from foreclosing on the house while she lived in it. Under a provision in federal law, the federal government “may not insure” a reverse mortgage unless the “homeowner” does not have to repay the loan until the homeowner either dies or sells the mortgaged property and defines “homeowner” to include the borrower’s spouse.

On appeal, the 11th Circuit Court of Appeals (Estate of Caldwell Jones, Jr. v. Live Well Financial (U.S. Ct. App., 11th Cir., No. 17-14677, Sept. 5, 2018)) ruled that the federal law in question only covers what the federal government can insure and does not govern the insurer’s right to foreclose. The court agrees with Ms. Jones that the law is intended to safeguard widows and implies that the federal government should not have insured the loan in the first place, but finds that federal law does not cover the insurer’s private right to demand immediate payment and pursue foreclosure.

When purchasing a reverse mortgage, it is always safer to put both spouse’s names on the mortgage. If one spouse is underage when the mortgage is originally taken out, that spouse can be added to the mortgage when he or she reaches age 62. If you have a reverse mortgage with only one spouse on it, contact your attorney to find out the best way to protect the non-borrowing spouse.