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Home > News & Events > ASBA® Tax Tips for Upcoming Tax Season

ASBA® Tax Tips for Upcoming Tax Season

Estate and Gift Tax

The Tax Relief Act of 2010 revived the estate tax for decedents dying after December 31, 2009, however, at a much higher applicable exclusion amount and lower tax rate than had been scheduled under prior law. The maximum estate tax rate is 35% with an applicable exclusion amount of $5 million. The modified carryover basis rules established for 2010 (which allowed an executor to allocate a basis increase of $1.3 million for assets passing to any individual, and a basis increase of $3 million for assets passing to a surviving spouse) were eliminated and replaced with the old stepped up basis rules that had applied until 2010. The Act further provides for "portability" between spouses of the estate tax exclusion amount. This allows a surviving spouse to elect to take advantage of the unused portion of the exclusion amount of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount, potentially $10 million.

As for the gift tax, the $1 million life time exclusion amount was eliminated for gifts made after 2010. The gift tax has been reunified with the estate tax and the combined estate and gift tax exclusion is $5 million, with a maximum gift tax rate of 35%.

Any assets given per person per year that total over $13,000 count against that individual's $5M unified exclusion. Each time a gift is over $13,000 per person per year the giver is required to file a gift tax return listing all such gifts with their income tax return for that year.

If the total counted gifts accumulate to more than $5M during one's lifetime, gift tax will be assessed at 35% for the amount exceeding the $5M, to be paid along with income tax. If that occurs, there will be no estate tax exclusion left so estate taxes will be assessed at 35% on any countable assets in the estate.

Keep in mind that if you are going to "give" assets through a trust and have them qualify for the exclusion that the assets have to be truly given and no strings can be attached. That means that assets must be truly given away or given to an irrevocable trust with someone else being the trustee.

Under the Tax Relief Act of 2010, the revived estate and gift tax rules, including the portability provision, are only temporary. The new rules will expire after 2012 unless Congress and the President act.

Qualifying Widow(er) With Dependent Child

If your spouse died in 2011, you can use married filing jointly as your filing status for 2011 if you otherwise qualify to use that status. The year of death is the last year for which you can file jointly with your deceased spouse.

You may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year your spouse died. For example, if your spouse died in 2010, and you have not remarried, you may be able to use this filing status for 2011 and 2012.

This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you do not itemize deductions). This status does not entitle you to file a joint return.

You are eligible to file your 2011 return as a qualifying widow(er) with dependent child if you meet all of the following tests.

  • You were entitled to file a joint return with your spouse for the year your spouse died. It does not matter whether you actually filed a joint return.
  • Your spouse died in 2009 or 2010 and you did not remarry before the end of 2011.
  • You have a child or stepchild for whom you can claim an exemption. This does not include a foster child.
  • This child lived in your home all year, except for temporary absences.
  • You paid more than half the cost of keeping up a home for the year.
Medical Expenses

For a senior citizen, tax season means adding up those out of pocket medical expenses. These costs can include a range of expenditures, including dental treatments, the cost of transportation needed to get to a medical appointment, health insurance premiums, and qualified long-term care services. The IRS states, "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of diseases, and the costs for treatments affecting any part or function of the body." For a full list of allowable medical expenses, see Publication 502 (2010) at the IRS website (

7.5% rule

The 7.5% rule says you can only deduct medical expenses-for both yourself and your loved ones — if these costs exceed 7.5% of your adjusted gross income.

Long-term care services

Long-term care medical expenses — including diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, and maintenance and personal care services — are deductible if the services are required by a chronically ill individual and a licensed health care practitioner prescribes the care. An individual is chronically ill if unable to perform at least two of six activities of daily living, which are eating, toileting, transferring, bathing, dressing, and continence. An individual who is cognitively impaired and requires substantial supervision is also considered chronically ill.

Nursing services performed in a nursing home, an assisted-living facility, or similar care facility are also deductible expenses if the person is principally receiving care for medical reasons. However, if a person is staying at a nursing home, an assisted-living facility, or similar care facility only for custodial reasons, only medical expenses are deductible; in this instance, meals and lodging are not deductible. If your qualifying relative is staying at a nursing home, assisted-living facility, or similar care facility for custodial care, a staff member should be able to state what percentage of care received qualifies as a medical care, says Nagle. Similarly, nursing services at performed at home are deductible expenses. If the patient is chronically ill, certain maintenance and personal care services are also deductible.

Long-term care insurance

Senior citizens and caregivers should be aware that premiums paid for qualified long-term care insurance contracts are also deductible medical expenses. According to the IRS, the contract must:

  • be guaranteed renewable;
  • not provide a cash surrender value;
  • not pay costs that are covered by Medicare;
  • provide that refunds, other than refunds upon death, surrender, or cancellation of the contract, and dividends are used only to reduce future premiums or increase medical benefits.


Taking care of grandchildren and other dependents may entitle you to additional tax breaks. In these difficult economical times it's not uncommon to see families living together in larger family units with children and grandchildren moving back home and the grandparents paying the biggest share of expenses. If you're supporting your family you may be entitled to claim some of them as dependents, even if one or more of them is not your child. You'll want to check the dependency tests but the tax benefits you may incur are worth the time.

Local and State Taxes

Many states such as New Jersey and PA offer additional tax credits, tax breaks, property tax rebates and tax freezes for seniors. In some cases these tax breaks are refundable, which means you may be entitled to a refund even if you don't owe any tax.

Required Minimum Distributions (RMDs)

You must eventually take a distribution and pay taxes on your traditional IRA or retirement accounts.

If the yearly distributions are not large enough, based on the amount in your account, a 50% excise tax could be assessed. To keep current with required minimum distributions, see Publication 590 on the IRS website ( and look for the life expectancy tables, then take timely yearly minimum distributions of your retirement nest egg. You must receive at least an "RMD" required minimum distribution every year by April 1 of the year after you turn 70 1/2.

As an example, if you turn 70 1/2 during 2012, you will need to take a "RMD" before April 1st, 2013. This is not taxable until 2013, however, you will also need to take a "RMD" for 2013, which is also taxable during 2013. To avoid this, consider taking your 2012 RMD during 2012, which is taxable in 2012; then next year take your next RMD, which is taxable in 2013.

Hiring In-Home Care
A tax reporting challenge may arise when families hire home care for an elderly parent. Many families find assistance thr ough an agency, but some choose to deal directly with an aide. In such a situation, the home care aide might legally be an employee, not just an independent contractor.

How to tell the difference? If they only work for you, and you control what hours they come in, they're really your employee. What are the consequences? The senior or the family, depending on who pays the bill, must withhold income taxes and payroll taxes — the employee's contribution to Social Security and Medicare — while make a matching contribution, as well as file quarterly and annual returns. To the extent that a home care aide provides nursing services — dispensing medication, bathing and grooming, and so on — their costs qualify as deductible medical expenses.

Data provided by Tax Hotline, our Tax Service partner. January 2012.