In light of the new tax plan that went into effect on January 1, many Americans are expecting a larger tax refund when they file next year. They shouldn't plan on it and here's why: The IRS just released revised tax withholding schedules last week and it's possible people will be underpaying their taxes.  

It's important to understand how the federal income tax system works. Form 1040 calculates how much tax is due.  Your refund amount is irrelevant. If you receive a $5,000 federal tax refund, then this simply means your withholdings exceeded the tax owed by $5,000. (See Line 63 of your 2016 Form 1040 for total tax due. If your withholdings and tax payments were higher, then you got a refund. If they were lower, than you owed an additional tax.)

Some people love getting (and spending) a big refund check, but it's really an interest-free loan to the government. Instead of getting the big refund in April, a simple change in the withholding amount can increase each paycheck by hundreds of dollars.

Since the IRS had to rush these new withholding schedules out as soon as possible, it is not entirely clear how accurate the figures are. Additionally, Democrats are accusing the current administration of manipulating the withholding schedules to artificially increase workers take home pay by under-withholding the federal income tax, which, in turn, may reduce or eliminate tax refunds next year.  

As the IRS, employers, and tax professionals attempt to figure out how to implement this tax plan competently, you should be prepared for all scenarios come next April, including writing an extra check to Uncle Sam.

Every year, a typical family may spend well over $5,000 on insurance premiums (not including health insurance): Life insurance, car insurance, homeowners insurance, umbrella coverage, smart phone insurance, etc.  What's the point of paying these premiums year after year?  These policies protect you and your family from a potentially large financial loss even if the risk of an incident happening is extremely small.  

For example, the annual premium on a 20 year $1M term life insurance policy for a 35 year old male might be $1,000.  In the unlikely event of death during the 20 year period, the insurance company will pay the named beneficiaries a death benefit of $1,000,000.  Will the insured complain he wasted $20,000 if he doesn't die during the 20 year period?  He shouldn't because the premiums paid provided him peace of mind that his family would be financially secure if were to pass away unexpectedly.

Many young families will have these protections in place as they raise children, buy real estate, and increase their net worth, yet neglect to implement the most important insurance policy - a comprehensive estate plan.  After all of your hard work, what happens if you or your spouse were to become incapacitated or suddenly pass away?  Without a complete plan in place, your family will likely be at the mercy of probate court.  

Why are many people adverse to completing an estate plan?  Death is a difficult topic to discuss and that's completely understandable.  Here’s the thing, however:  Estate planning has more to do with living than dying, especially for a young family.  If you became sick and couldn't make your medical or financial decisions, who would? (Hint: Without the appropriate documents in place, your spouse does NOT have an inherent right to do so without probate court approval).  If you were to pass away suddenly, who is going to take care of your children and manage their financial affairs?  How can you prevent them from squandering their inheritance the moment they turn 18?  How can you avoid the costs and delays of court proceedings? How can you minimize income and estate taxes?

A comprehensive estate plan consists of more than just a couple of legal documents.  Unfortunately, some companies give the false impression that an estate plan is simple as filling out an online form from the comfort of your living room, paying a small fee, and printing the documents.  (Ironically, the leading provider of online legal documents has a disclaimer at the bottom of its website stating they are not a substitute for an attorney and cannot provide legal advice!) Everyone's situation is different and there are a number of factors that determine the appropriate plan and a qualified estate planning attorney can guide you through the process.

Over the next few weeks, I will be highlighting some estate planning topics on this blog.  Please feel free to call or email me (bdelaney@delaneylawoffice.com) if you want to learn more about our comprehensive estate planning  process.

With a major tax bill pending, now is the right time to see what you can do to reduce your income tax bill before year's end.  Here are some ideas:

Defer to the Second Half

In football, when a team wins the opening coin toss, they can elect to receive the ball to start the game or wait until the start of the second half.  Patriots' fans know that if he wins the coin toss, Coach Bill Belichick will always defer possession to the second half.  Why?  He sees a bigger benefit to having the extra possession later on in the game as opposed to the opening drive.

If you are self-employed and are owed money, is it better to receive income now or a little later?  Most people prefer to get paid now, but if the tax rates are lower in 2018, it may be advantageous to wait a couple of weeks.  Assume that under the current tax code, your top marginal tax rate is 28%.  Under the proposed tax plan, it could be 22%.   A $10,000 payment received on 12/31 would generate $2,800 in federal income tax.  If it was deferred to January, the tax incurred might be $2,200, a savings of $600.

Pay Your January Mortgage Now!

For most homeowners, their mortgage bill is due on the first of the month and can be paid as much as 15 days late without incurring a late charge.  Due to the itemized deductions limits in the tax plan, some taxpayers will lose homeowner tax benefits.  Currently, a homeowner can deduct mortgage interest and real estate taxes paid on Schedule A.  If you make the January payment in 2017, the accrued mortgage interest can be deducted in 2017.  Additionally, if your lender does not escrow your real estate taxes and your city/town has already issued the next tax bill due 2/1, then you might be able to pay and deduct that in 2017 as well.  (Tip: If cash is tight after the holidays, check and see if your city/town takes credit card payments.  The deduction is based on the date you pay, not the date you pay the credit card bill!)  Assuming a mortgage payment of $2,200 (including $1,800 in mortgage interest), a taxpayer in the 25% tax bracket will save $450 by paying on December 31 instead of January 1.

Give to Charity and Empty Your Closet 

Some taxpayers will not be able to deduct charitable contributions under the proposed plan because it will be more beneficial to claim the new standard deduction.  If that's the case, make your 2018 charitable contributions now!

Caveat: The proposed tax plan has not yet passed and its final provisions are subject to change.  As always, consult your tax advisor on all tax related matters because everyone's tax scenario is different.

submitted by Brian J. Delaney, Esq. 

The proposed Trump tax plan makes some significant changes to the Internal Revenue Code.  Although being promoted as major middle-class tax relief, some seniors may actually face a massive tax increase.  Under the proposed plan, taxpayers could no longer itemize medical expenses on Schedule A.  The current tax code allows a taxpayer to take an itemized deduction for medical expenses that exceed 10% (or 7.5% if born before 1952) of their adjusted gross income.

It is true that most taxpayers do not have enough medical expenses to take a deduction.  However, long-term care is extremely expensive and the ability to deduct these expenses can greatly reduce or eliminate both federal and MA income taxes for some seniors.

Imagine that Bob is a widower with advanced Alzheimer's disease.  He is 85 years old and although he cannot live alone, he is relatively healthy other than his memory issues.  His family found a nice assisted living facility with a secure memory unit.  The facility does not accept MassHealth/Medicaid and costs $8,000 per month (or $96,000 per year).

Bob receives about $20,000 per year in social security benefits and he has a $700,000 traditional IRA. It is conservatively invested and generates a 5% return.  His medical insurance premium is $300 per month and he spends about $100 per month on co-pays and other out of pocket expenses.

Withdrawals from a traditional IRA are considered taxable income.  Currently, Bob can withdraw $85,000 from his IRA each year and take an itemized medical deduction for the assisted living expenses, medical insurance premiums, and co-pays.  Under current tax law, this eliminates nearly all of his federal and Massachusetts income tax.

Assuming Bob withdraws $85,000 per year out of his IRA), he can privately pay for 10 years of assisted living. 

If Bob can't itemize his medical expenses under the new tax plan, then he will only be able to pay for 6 years of assisted living.  In order to net $85,000 after taxes, he will need to withdraw $115,000 from his IRA each year.  Because he won't be able to deduct his medical expenses, he will owe almost $30,000 in federal and Massachusetts taxes each year. 

What happens after Year 6 under the Trump tax plan? Bob will have no money and will likely need to move to a skilled nursing home facility that accepts MassHealth/Medicaid, even if the assisted living is a better placement.

How do the Trump "tax cuts" help Bob? He will pay an additional $180,000 in income taxes over the next 6 years.   

Timing is everything, especially when it comes to long-term care/asset protection planning.  Enter the dreaded "Five Year Look Back."  It is one of the first things a prospective client asks me about.  When applying for long-term care MassHealth benefits, the applicant must disclose all transfers for less than fair market consideration made in the previous 60 month (or 5 year) period.  If MassHealth treats the transfers as disqualifying, then the applicant will be denied benefits for a period of ineligibility known as the penalty period.   The penalty period is calculated by dividing the gift amount by the transfer divisor, which is the average cost of a nursing home in Massachusetts.  For example, a $50,000 gift divided by $354 (2017 transfer divisor) would generate a penalty period of 141 days.  Who pays the nursing home for those 141 days? Often, the family member will need to "cure" the gift to pay for the long-term care costs.

The penalty period begins when the applicant is "otherwise eligible" for MassHealth benefits.  For a single person, this means she has total of assets of less than $2,000.  Under the old law that was in effect until 2006,  the penalty period began to ran at the time of the transfer.  Therefore, you could have made a gift of $50,000 knowing that it would be safe as long as you didn't need to apply for nursing home care benefits during the short penalty period.  Unfortunately, the current law states that the penalty period won't begin to run until the applicant is in the nursing home and has very little in assets. This means any disqualifying transfer made within the five year look back period will affect eligibility. 

Timing is critical when it comes to applying for MassHealth benefits.  The $50,000 gift made 5 years and one day prior to applying does not have to be disclosed and will not affect eligibility.  If the application is filed 4 years, 11 months and 29 days after the gift was made, then the applicant could be facing a penalty period of 141 days instead.   Keep in mind that a larger transfer would trigger a larger penalty period.  A $600,000 home transfer to a child or irrevocable trust could potentially generate a 1,694 day penalty period! 

Not every transfer for less than fair market consideration will be considered disqualifying by MassHeath.  For example, transfers to a spouse or a disabled child are non-disqualifying.  There are other specific exceptions related to real estate, such as a transfer to a "caretaker child," but it is necessary to sit with an elder law attorney to determine if such transfers meet the regulatory requirements.  Technically, transfers made within the five year look back period are not disqualifying if "the resources were transferred exclusively for a purpose other than to qualify for MassHealth."  Although we have successfully defended transfers under this regulation by using affidavits or other documentation, MassHealth has unofficially taken the position that older people can't make gifts without considering the MassHealth implications and therefore any gifts made within the five year look back are disqualifying.

The five year look back went into effect on February 8, 2006.  Prior to that date, any outright transfer was subject to a three year look back.  Although there have been rumors of a seven or ten year look back, it has not been seriously considered by Congress...yet.  Medicaid spending is a hot-button issue and in today's current political climate, anything is possible.  

If you would like to sit down and discuss the pros and cons of advanced asset protection planning, please do not hesitate to contact me.

It looks like Congress will be extending the payroll tax cut through the end of 2012.  Many people assume it is a good thing, but don’t understand how it affects their tax returns.  This payroll tax cut actually went into effect in January in 2011.  Will you see a bigger tax refund?  For most people, the answer is no.   In fact, some people will be paying more in tax this year as opposed to last year!  I prepare tax returns for many of my clients and I have quickly realized that a number of them will end up paying more than last year.  Why? Read on…

The reason why most people will not see a benefit is because the payroll tax cut was already paid during the year.  Do you remember it?  Probably not… Take a look at your paystub and look at the various deductions.  You will see either a deduction for “FICA” (Federal Insurance Contributions Act) or two separate deductions for “Medicare” and “Social Security.”    These are known as payroll taxes.  I still remember receiving my first pay check from Star Market when I was 16…I was so angry that this “FICA” organization was taking a big chunk out of my take home pay! 

Payroll taxes are paid equally between the employer and employee.  Typically, you will pay 6.2% of your wages in social security tax and 1.45% in Medicare tax, and your employer pays the same.  The employer portion is not shown on your paycheck or W-2.  If you’re self-employed, you have to pay the entire amount 15.3% yourself.

Prior to 2011, Congress had passed a number of stimulus-type tax breaks for individuals.  In 2009 and 2010, the “Making Work Pay Credit” gave workers a tax credit of up to $400 (individuals) and $800 (married couples).   The “Making Work Pay Credit” was an income tax credit.  The current payroll tax cut reduces an employee’s social security tax contribution from 6.2% to 4.2%.

How does the payroll tax cut work in real life?  Assume you make $52,000 and are paid bi-weekly for a total of 26 paychecks per year.  Normally, the social security portion of the payroll tax would be $124.00 (6.2% of $2,000.00).  With the payroll tax cut in place, the social security tax would be $84.00, for a savings of $40 per paycheck (or $1,040.00 per year).  Clearly, that’s a good a chunk of change.

OK, getting back to this year’s tax return…unless you are self-employed and need to report self-employment taxes on your Federal 1040, the payroll tax does not affect your tax return at all.  If you’re income is similar to last year’s, then you are actually paying more in income tax because the $400 tax credit from 2009 and 2010 is no longer in effect.  However, the payroll tax break you received during the year was likely higher.

So which taxpayers got shafted by the payroll tax cut? If you are a local or state government employee (such as a teacher, police officer, or fireman, etc) and you pay into the state pension system, then you do not pay social security tax.  Last year’s tax credit was available for anyone who had wages, but this tax break only applies if you pay social security tax.   If you didn’t pay social security tax, then you’re not getting the tax break.  Sorry!

If you have any questions regarding tax preparation, please do not hesitate to contact me at bdelaney@delaneylawoffice.com.

I have represented many first-time home buyers.  These clients are typically very enthusiastic about purchasing their first home.  I have also helped many clients (as young as 18 years old and as old as 99 years old) with estate planning.  As you can imagine, these clients are polar opposites from my first-time home buyer clients.  I have never had a client say to me, “I’m so excited to sit down and talk about what happens to my property or my kids if I unexpectedly die or become incapacitated!”  It takes some clients months, if not years, to gather the courage to sit down and talk about estate planning. 

I fully understand the hesitancy to talk about the subject.  When I meet with a young couple, I make it a point to them that there is a strong likelihood they will live to see their children and grandchildren grow up.  Estate planning for young people is usually about planning for worst case scenarios.

Over the next several weeks, I will be posting blogs entries about various topics related to estate planning.  However, estate planning is an ugly term.  From now on, I will be referring to it as life planning.  Why life planning?  In addition to determining what happens to your assets when you die, you also need to execute documents such as a durable power of attorney and healthcare proxy in the event you are incapacitated.  If a parent dies, life must go on for his or her children.  Who will become guardian?  Who will manage the inherited property?  Your “estate planning” is really a roadmap for the rest of your children’s lives.

There are two ways to follow my upcoming blog entries on estate planning.  First, you can click hereto sign up to receive blog updates by email or you can visit our Facebook page at www.facebook.com/delaneylawoffice.  If you click “like” on our page, our blog entries will be included in your news feed.

If you have any topic you want us to discuss, please email me at bdelaney@delaneylawoffice.com.

Due to last minute tax changes by Congress, the IRS has announced that some tax returns will not be processed until February 14.  If you itemize your deductions on Schedule A (mortgage interest, taxes paid, charitable contributions, etc), claim the higher education tuition and fees deduction, or claim the educator expense deduction, you will not be able to e-file until the 14th.  For our clients, we will finalize returns but hold off e-filing until we get the green light from the IRS.

All other returns can be filed immediately.

Check out the IRS website for more information here.

We are pleased to announce the launch of our new website, www.delaneylawoffice.com!  Between the detailed website content and frequent blog entries, we hope to keep our clients up to date on developments in real estate, estate planning, tax law, and elder law. 

We are also teaming up with a company called LegalVault to offer a secure online document storage system for our clients.  LegalVault offers some exciting features.  Clients are able to upload important legal documents to their account and can access the documents from any computer with internet access.  In addition, clients are provided with a wallet card containing an access code for healthcare providers to access their important healthcare documents such as a healthcare proxy, living will, or even a list of allergies and medications. 

 If there is any topic you want us to discuss in our blog, please do not hesitate to contact us.