Pre-planning with Trust – Medicaid and Medi-Cal and how to pay for nursing costs

In California, Medi-Cal sometimes pays long-term nursing home and home care costs if you can’t afford the cost of a nursing home.

Long-term care like nursing homes, assisted living facilities, and home care are expensive, and private health insurance policies generally do not cover those services. Medicare coverage for long-term care is very limited, and few people have purchased private long-term care insurance policies. For California residents needing long-term care services, Medi-Cal is the most common source of funding. Medi-Cal pays for the nursing home expenses of approximately 65% of the residents in California nursing homes.

Medi-Cal is California’s state Medicaid program. It is funded by both federal and state funds, and it provides health insurance to about 25% of California’s population. There are many different ways to become eligible for Medi-Cal, and there are specific eligibility rules for long-term care services like nursing homes, assisted living facilities, and home health care services. The California Department of Health Care Services (DHCS) administers long-term care programs in California.

Medi-Cal for Nursing Home Residents

Skilled nursing facilities are residential facilities that offer round-the-clock skilled nursing care in addition to other supportive services. These nursing homes are expensive, averaging approximately $7,000 per month in California in 2012. Most people cannot afford to pay their own nursing home expenses.

Medi-Cal will pay for a nursing home only when it is “medically necessary.” California defines medically necessary as “when it is reasonable and necessary to protect life, to prevent significant illness or significant disability, or to alleviate severe pain.” For Medi-Cal to pay for a nursing home stay, your treating physician must prescribe a nursing home for you because you either need the continual, round-the-clock availability of skilled nursing care or what’s called “intermediate care.” Skilled nursing care includes things like giving injections, inserting or replacing catheters, changing wound dressings, feeding through a gastric tube, and treating bed sores. Intermediate care means a protective and supportive environment with “observation on an ongoing intermittent basis to abate health deterioration.” To determine whether you need at least an intermediate “level of care” (LOC), Medi-Cal will do an LOC assessment that looks at your limitations in your activities of daily living (ADLs), cognitive function, and physical function and your need for help with medication and treatments.

If you need a health care aide or nurse only for one or two things a day, then Medi-Cal may find that a nursing home stay is not medically necessary, because you could get these services on an outpatient basis or by a home health provider. In essence, your doctor must find that your health is at risk if you do not have access to skilled nursing or intermediate care.

Qualifying for Medi-Cal

If you already qualify for Medi-Cal, then your Medicaid coverage includes nursing home care if you need it. Groups of people who automatically qualify for Medi-Cal include SSI recipients, participants in the CalWORKs (California’s Temporary Assistance to Needy Families) program, individuals enrolled in California’s refugee programs, and children in its foster care system.

Medi-Cal Income and Asset Limits

If you do not already qualify for Medi-Cal, you might be eligible if you have little income. Thanks to the Affordable Care Act (ACA), the income limit for Medi-Cal now works out to 138% of the Federal Poverty Level (FPL). That is about $16,100 for an individual and $32,900 for a family of four.

While the ACA has eliminated an asset test for many Medicaid applicants, if you are elderly or disabled, you will still need to have few assets to qualify for Medi-Cal: $2,000 for an individual and $3,000 for a couple. Some assets are not counted, such as a home if your spouse is living there or if you intend to return there, one vehicle, personal belongings, and small burial or life insurance policies.

You are permitted to “spend down” your assets to qualify for Medi-Cal by paying for certain kinds of debts or expenses. If you are trying to spend down your assets, get advice from a lawyer or legal aid office first. Be very careful about transferring any of your assets. Medi-Cal will look back 60 months from the date that you apply for Medicaid-paid long-term care and examine any asset transfers to see if they were legitimate. If you give property away for less than it is worth, then Medi-Cal will impose a waiting period before you can start getting your benefits.

Share of Cost Medi-Cal

If you are “over-income” for Medi-Cal but have high health care expenses like nursing home fees, then you might qualify for a program called Share of Cost (SOC) Medi-Cal. SOC Medi-Cal allows recipients to pay a certain portion of their income every month towards their medical expenses, and Medi-Cal pays all of the expenses incurred afterwards. The portion that the Medi-Cal recipient pays is called his or her share of cost.

SOC Medi-Cal is an important resource for individuals who might have higher incomes but who find that they cannot afford the cost of long-term care. However, Medi-Cal only lets long-term care residents keep a very small personal needs allowance ($35-$50/month) when they receive SOC Medi-Cal. Any non-exempt income above that personal needs allowance has to be paid to the long-term care facility before Medi-Cal will cover additional costs each month. In essence, Medi-Cal pays the difference between the monthly cost of the nursing home and the monthly income of the Medicaid recipient (minus $35).

Medi-Cal for Assisted Living Facility Residents

Assisted living facilities (ALFs) offer a wide range of supportive services like housekeeping, medication management, meal preparation, and assistance with dressing and bathing, but they do not offer skilled nursing care. In general, Medicaid pays for room and board only when they are offered in an institution that provides skilled care (like a nursing home), and it does not generally pay for room and board expenses in assisted living facilities. However, in California, to assist with the costs of assisted living facilities, the state has created a Medi-Cal program called the Assisted Living Waiver (ALW).

ALW is a Home and Community Based Services (HCBS) waiver program that offers care coordination services and can pay for expenses associated with some assisted living facilities and also with some home health services. Most recipients of ALW services still have to pay most of their income to the assisted living facility for room and board charges.

To be eligible for ALW, you must be eligible for Medi-Cal and require an intermediate level of care. You meet that level of care if, without the ALW services, you would need to live in a nursing home. However, because ALW is a Medicaid waiver program, it does not need to be equally available to everyone in the state who is eligible for it. At this time, California has opted to make the services available to some seniors and people with disabilities living in Sacramento, San Joaquin, Los Angeles, Sonoma, Fresno, San Bernardino, Contra Costa, Alameda, San Diego, Riverside, Kern, Orange, Santa Clara and San Mateo counties.

If you qualify for ALW, you must use one of the assisted living facilities that have been approved by the state to participate in the program. The state licenses and regulates assisted living facilities that wish to receive Medi-Cal payments. Those approved facilities are called Residential Care Facilities for the Elderly (RCFE). There are three different RCFE licenses, depending on the level of care that the facility offers. In a Level 1 RCFE, residents are largely independent and receive minimal assistance with their personal care. In a Level 2 RCFE, residents receive frequent assistance with personal activities of daily living. In a Level 3 RCFE, residents receive extensive assistance with personal activities of daily living, and they may occasionally require the services of a skilled nurse or other medical professional. RCFEs can have as few as six beds or as many as 100 beds.

SSI/SSP Payments for Assisted Living or Custodial Care

California’s SSI/SSP program also pays for some non-medical custodial long-term care. (Many people who are eligible for Medi-Cal are also eligible for SSI.) SSI is paid for by the federal government, but California pays an extra supplement to its residents called the “state supplementary payment” (SSP). The SSP amount is higher for those living in a “non-medical out of home care” situation (board and care, RCFE, or ALF). Someone who receives SSI/SSP in California and lives in a assisted living facility or RCFE receives $1,133 monthly, and the long-term care facility may charge no more than $961, leaving a small personal needs allowance for the recipient.

Medi-Cal for Home Health Care

California covers home health services as part of its state Medicaid plan. Medi-Cal covers home health services that are medically necessary, like skilled nursing care and medical equipment. For individuals who need ongoing, non-skilled care like assistance with bathing, cooking, and chores, California has the In-Home Supportive Services (IHSS) Program.

The IHSS program pays for home care services that aren’t necessarily medical in nature. The types of services covered by IHSS include housecleaning, meal preparation, laundry, grocery shopping, bathing, bowel and bladder care, accompaniment to medical appointments, and protective supervision for the mentally impaired. To be eligible for IHSS, you must be 65 or older, disabled, or blind, and you must be living in a home, not an institution. In addition, you must meet the financial eligibility criteria for Medi-Cal, and you must be unable to live at home safely without IHSS services.

When you apply for IHSS, your county will send a social worker to interview you about your needs and review your medical records. The county will use the results of the needs assessment to decide how many hours of in-home services it will pay for each month. In 2013, non-severely impaired applicants could receive up to 195 hours each month, and severely impaired applicants could receive up to 283 hours.

You apply for IHSS through the Department of Social Services, using this Application for Social Services form.

 Medicaid/Medi-Cal Pre-planning With Trusts

If you are worried about the high costs of long-term care and how it will affect your estate, this is the chapter for you. Seniors over the age of 65 have a 50% chance of needing a nursing home someday. The pressing question for most people is: “How can we afford to pay the nursing home without losing everything we own?” The second question is: “What can we do to plan ahead?”
The Problem: In the United States, care in a skilled nursing facility can run from $2,500 to $25,000 per month or more, depending on your location. The average
stay in a nursing home is approximately three years. In certain cases, such as dementia, a stay of three to twenty years is not uncommon.
In California, the average cost of care in a nursing home is approximately $5,500 per month, or $66,000 annually. Three years of care is $198,000. The greatest threat to your loved one’s hard-earned money is the high cost of nursing home care.
Planning ahead for such costs is prudent and wise.

There are only four choices for paying for skilled nursing home care:

1. Private Pay. You can privately pay the nursing home by writing them a check once a month.
2. Long-Term Care Insurance. It is great if you have long-term care insurance, but even if you do, it does not always cover all your costs and it often has time limits. Moreover, you have to buy it before you need it.
3. Medicare. Medicare, in conjunction with your supplement, may pay for up to 100 days of coverage, as long as you continue to improve. If your condition plateaus, or if your health starts deteriorating, Medicare can stop paying for your stay at the nursing home within a week.

4. The Medicaid/Medi-Cal Program.

Medicaid is a needs-based Federal entitlement program, implemented by the states, which provides funding for medical care for those who qualify.

The California version of Medicaid is called Medi-Cal.

The Medicaid Program will pay for your stay in a nursing home and will cover most drug costs for those who qualify.

The Solution: If preservation of assets for your family is your goal, the Medicaid program is the only cost-effective way to pay for nursing home care.

There are two important aspects of the Medicaid Program you must know in order to plan properly:

1. Qualifying for Medicaid/Medi-Cal

In order to qualify for Medicaid, you must meet a strict asset and income test. The numbers vary from state to state. However, in every state, there are assets that are exempt (not counted) when Medicaid determines whether you qualify. Also, Medicaid will look at the applicant’s financial records for the past three to five years to find any “uncompensated transfers” (gifts). If they find gifts, they can calculate a penalty period during which they will not pay for the nursing home. The rules of Medicaid are complex. You need to hire an advocate, such as a qualified Elder Law attorney, who knows the rules and how to formulate a working strategy.

2. The Medicaid Lien

If your loved one qualifies for Medicaid, is receiving benefits during a stay in a nursing home, and owns assets that were “exempt” for qualification purposes, such assets may be subject to a Medicaid recovery lien upon his or her death. However, with knowledge of Medicaid rules, your Elder Law Attorney should know how to legally defeat the Medicaid lien and protect the assets from recovery.

There are three stages to Medicaid planning

Stage One: Your estate Plan

A professionally crafted estate plan is essential for Medicaid planning and should include the following documents:

a. Revocable Living Trust

There are myriads of benefits to owning your property in a living trust, but such trusts are especially useful for purposes of Medicaid planning. A properly drafted living trust solves the problem of not being able to manage your assets if you become incapacitated. You can name a person who will act as trustee and manage the assets in the trust if you are unable to do so yourself. In order to be properly drafted, your trust must contain special language granting your trustee the powers necessary to implement Medicaid planning.

b. Financial Power of Attorney

Equally important is the financial Power of Attorney, which also requires special language so your agent can implement Medicaid planning along with the trustee of your living trust (typically the same person).

c. Irrevocable Trust

In the right circumstances, and in consultation with an Elder Law attorney, families with larger estates and trustworthy adult children may be able to utilize Irrevocable Trusts to achieve Medicaid eligibility.
d. Other Important Documents Every Estate Plan Should Have.

Every estate plan should also have a Pour Over Will, Advance Health Care Directive or Healthcare Power of Attorney (depending on the state), HIPAA Authorization, and a Living Will

If you have the above documents in place, they are properly drafted, and you keep them current by reviewing them with your attorney every few years, you are ready for Stage Two, if necessary. Suppose you have prepared the above documents and are now faced with a crisis situation where you need to apply for Medicaid.

Stage Two: Spend down and Application

You will need to consult with an attorney in your state regarding the spend down process and how to fill out the Medicaid application. “Spend down” does not mean spending all your money until you hit the qualification limits. What it does mean is that you implement a plan to reposition assets within the rules of Medicaid in a legal, ethical, and moral manner. The Medicaid rules allow you to spend down your money by paying for any necessary medical needs you may have (i.e., new glasses, hearing aids, etc.). You can also spend money to fix your home. Because the home is exempt, you are turning a non-exempt resource (cash) into an exempt resource, the home.

The opportunities for spending down in accordance with Medicaid rules are vast and vary from state to state. One very important purpose behind the rules is to ensure a “well-spouse” is not completely impoverished by spending down the “ill-spouse’s” assets.

For example, in California in 2008, the “well-spouse” is allowed to keep $104,400 in assets, and $2,610 in income. John Doe and Mary Doe are a married couple who has $250,000 in assets, and a $250,000 home. John Doe has developed Alzheimer’s disease and requires around-the-clock care in a skilled nursing facility. John has $1,200 per month in income and Mary has $700 per month in income.

In order to qualify John for Medicaid, his assets must be spent down to $2,000. Mary gets to keep $104,400 in cash assets, plus the house, because it is an exempt asset. Now comes the fun part.

John and Mary are “over-property” by $146,000. That amount must be “spent down” or “repositioned” in order for John to qualify for Medicaid. A good attorney will notice that John and Mary’s income only totals $1,900 per month. John can only keep $35 per month in income and Mary is entitled to $2,610 in income. Mary’s current income is only $1,865 per month.

Mary’s attorney can go to court and ask the court to increase the amount of assets Mary is allowed to keep from $104,400 to an amount that, if invested conservatively, will produce an income stream that will bring Mary up to the limit of $2,610 per month.

The question then becomes: How much money will it take to produce an income stream for Mary that will produce $745 more in income?

Often, the court will award the entire estate to Mary without her having to spend down a dime (except for attorney fees, of course) so she can support herself. This is just one example of a planning opportunity existing within the rules of Medicaid.

Your attorney can fill out your Medicaid application for you and present it to the Medicaid office with evidence attached detailing asset repositioning you have done, along with a copy of the Medicaid rules authorizing such repositioning. A good attorney will determine whether further revocable trust planning is necessary. For example, it is necessary to ensure that the person who is going on Medicaid does not receive an inheritance unless it is in the form of a Special Needs Trust, designed to supplement but not replace Medicaid benefits.

Stage Three: defeat of the Medicaid Lien

Your attorney will best be able to advise you about how to avoid the Medicaid lien. The issue is very state-specific. If you have done the above planning, defeating the lien should not be a difficult task.

Find an estate planner/lawyer to relieve your fear and uncertainties regarding disability, the high costs of long-term care, and death.

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Transfer of assets to qualify for Medicaid

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How to avoid capital gains tax

First, you can use a tax-protected retirement account to avoid paying capital gains taxes on the proceeds from your stock sales. As long as you keep the proceeds in the account and resist the urge to make premature withdrawals, you can grow your retirement savings on a tax-free basis for an indefinite period of time. 

However, your retirement account may be subject to certain contribution limits. If you’re under the age of 50, you can contribute just $5,000 per year into your tax-protected IRA account. If you’re over the age of 50, you may be able to contribute as much as $6,000 into your account. Before you make any contributions, be sure to check with a licensed tax professional.

If you’re trading stocks in a U.S.-based traditional brokerage account, you’ll almost certainly be required to pay capital gains on your earnings. For tax purposes, “capital gains” are defined as the profits produced by the sale of a given stock. Although the tax rates on capital gains fluctuate from year to year, it’s safe to assume that you’ll need to forward at least 15 percent of your profits to the IRS.

Since “short-term” capital gains are taxed at higher rates than “long-term” capital gains, you may wish to avoid selling stocks that you’ve held for fewer than 12 months. It’s also crucial to note that dividends are taxed as regular income. When you calculate your total investment-related earnings at tax time, you’ll need to account for your capital gains and dividend earnings separately.


Although some investors may be able save big on capital gains taxes for the next 3 years, only a few will be so blessed. If you’re at, or close, to the bottom of the income ladder, you’ll be able to save 100% on your capital gains taxes. Those eligible for the savings aren’t the ones in the 15% capital gains tax bracket. If you are currently paying 5% on capital gains, you’ll be able to forego chipping in for a while, but you have to do your homework first. Remember, there are long term capital gains and short term capital gains. Short term capital gains are those from investments held less than 12 months. These are taxed at your income tax rate, which is almost always greater than the capital gains tax rate.

The bad news is that, unless the lower tax rates are extended by congress, they’ll revert to where they were in 2003. That means you’ll go from paying no capital gains taxes to vaulting right past the 5% rate, and jumping up 100% to 10%. If you’re single and earn over $31,850 in 2007 (more for 2008), you’re ineligible for the 0% tax rate. You’ll be stuck paying the higher 15% capital gains taxes. The income level is effectively less than $31,850 because the sale of stock bonds and mutual funds will generate income that’s added to your other earned income. Together, the combined dollar amount can easily be over $31,850.

Other Ways to Save

Capital gains taxes will be owed any time you sell a highly appreciated asset, weather it’s a collector car, investment portfolio or real estate. In addition, you’ll have to pay capital gains taxes on the sale of your business. The last one really hurts. You work hard for decades, put in blood, sweat, and tears, and then owe the government around 25% of the profits on the sale.

Capital Gains Tax Savings Strategy #1

To avoid paying capital gains taxes on a piece of real estate, you must live in it as your primary residence for at least 2 years. If you’re single or married and filing separately, you’ll get to exclude $250,000 of capital gains on that property. If you are married and file jointly, the exclusion jumps to $500,000. That works great for single family residences, but that strategy is harder to apply to commercial property or multi-family complexes.

The one thing that may people fail to realize is that it doesn’t matter when the property appreciates, as long as it is the primary residence for at least 2 of the last five years of ownership. This means you could buy a house then live in it for 2 years and sell it, or buy a house, rent it out for 3 years, move into it for 2 years and then sell it. There are many combinations that would qualify. If you owned 2 or more properties, you could live in one of them for two years, sell it and move into another for 2 more years, sell that one and move into another of your properties.

Capital Gains Tax Savings Strategy 

One Time honored strategy to defer capital gains taxes is through the use of a irrevocable domestic non-grantor trust. Such a trust is a legal entity that will allow you to defer capital gains taxes according to IRS supplied mortality tables. For domestic trusts, this time period can be up to 20 years and for international trusts, the time period can be up to 30 years. This is a vehicle that requires an advisor well versed in all its idiosyncrasies. Such tax deferment vehicles are extremely complex, yet very effective. When done correctly, these trusts will also allow you to defer not only capital gains, but also all income taxes on reinvested assets. An additional benefit is the possible elimination of inheritance and transfer taxes.

Capital Gains Tax Savings Strategy #3

You have to plan for your capital gains taxes in order to properly, and legally defer or avoid them. Often a good plan hinges on legal structures that must be in place before you make your gains. In addition, you can make decisions that, once made, cannot be undone and can cause you to be facing a hefty IRS payment. This definitely applies when deciding on a time to sell or convert assets.

For example, if you have a large block of stocks or funds purchased at various times throughout the past few years, you may sell a portion of them. If you inadvertently sell assets purchased recently, rather than those purchased farther back, you can be facing a hefty tax bill. To avoid this being treated as a short term capital gain you must notify your broker of your intention to divest yourself of a block purchased farther in the past. The broker must be notified before you place your sell order, unless you’d rather pay income tax, rather than be liable for capital gains taxes, which are not only lower, but can then be deferred according to your capital gains tax strategy.

Capital Gains Tax Savings Strategy #4

Doubling down refers to the practice of repurchasing a stock after selling it at a loss for tax purposes. If you have an unrealized loss, but feel the stock is sound, and will turn around, you can sell it and take the loss for the purposes of reducing your capital gains taxes. You must then wait more than 30 days before you repurchase it to avoid the sale being termed as a “wash sale”. A wash sale is when an investor sells an investment only to repurchase it again within 30 days. In such cases you must deferred and, to make matters worse, the cost basis of the investment is raised to reflect the new amount. This can easily cause you to lose out on a loss you were counting on to reduce your tax liability.

Capital gains taxes are a very complicated subject. There are some very effective tax reduction, avoidance, and deferment strategies available that apply to capital gains taxes, most of which are not mentioned here. They are best left to experts in this specific field.

For most taxpayers, there’s no change to their ordinary income and capital gains rates. But tax rates for high earners have increased, including:

A new top marginal tax rate of 39.6% (it was 35% in 2012) on income above $400,000 for singles and $450,000 for married couples filing jointly

A new 20% tax rate on capital gains and qualified dividends (it was 15% in 2012) for taxpayers who are in the 39.6% marginal tax bracket

High-income taxpayers are also subject to limits on exemptions and deductions in 2013. The income threshold for the Pease and PEP (personal exemption phaseout) limitations is $300,000 in adjusted gross income (AGI) for joint filers and $250,000 for singles. The Pease limitation reduces the value of charitable contributions; mortgage interest; state, local, and property taxes; and miscellaneous itemized deductions. For 2013, this limitation is the lesser of 3% of AGI above the threshold up to 80% of the amount of the itemized deductions otherwise allowable. The PEP limitation reduces the total personal exemption by 2% for every $2,500 of income above the same income thresholds with no upper limitations. That means it’s possible for some taxpayers to completely phase-out of their personal exemptions.

Changes to the estate and gift tax structure are minimal. The federal estate exclusion will be adjusted for inflation going forward and is currently $5,250,000 in 2013, (up from $5 million in 2012) and the top rate on amounts above the exemption has been raised to 40%, from 35%.

In addition, tax provisions included in the Affordable Care Act went into effect in 2013. Specifically, taxpayers with modified adjusted gross income (MAGI) above $200,000 for singles and $250,000 for couples may owe:

An additional Medicare tax of 0.9% on income for those with MAGI above the thresholds

A Medicare surtax of 3.8% on the lesser of net investment income or MAGI above the thresholds

Also, legally-recognized same-sex marriages are now recognized for federal income tax purposes and Medicare benefits, after the U.S. Supreme Court struck down a key section of the federal Defense of Marriage Act (DOMA). Every same-sex legally married couple should examine their individual situation to determine the impact of various filing statuses on the amount of tax they will owe.

How can you be more tax efficient in light of these changes? Let’s take a look at some tax strategies to consider by the end of the year.

Strategy 1: Reduce income

The simplest way to lower current-year taxes is by contributing to a 401(k), 403(b), governmental 457, traditional IRA, Simplified Employee Pension (SEP) plan, or other type of qualified retirement savings plan. Qualified contributions reduce your taxable income.

Consider contributing as much as you can to a 401(k), or at least enough to receive your full employer match—if one is offered. For 2013, the contribution limit increased by $500, to $17,500 if you’re under age 50, and to $23,000 if you’re age 50 or older.

Next, make a tax-deductible contribution to a traditional IRA, if you qualify. For 2013, the limits for tax deductibility are up to $59,000 in AGI for full deductibility if single and up to $95,000 for full deductibility if married, filing jointly; from $59,000 to $69,000 for partial deductibility if single, and from $95,000 to $115,000 for partial deductibility if married, filing jointly. In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $178,000 for 2013; partial deductibility for MAGI up to $188,000. Contribution limits have increased for 2013 to $5,500 for taxpayers under 50, and $6,500 for those 50 and older. Self-employed individuals with a SEP, meanwhile, can contribute up to $51,000 or 20% of their adjusted earned income for 2013.

If you are still working, not using Medicare, and are enrolled in a high-deductible health plan (HDHP), another way to reduce taxable income is by contributing to a Health Savings Account (HSA). In 2013, you can contribute up to $3,250 annually as an individual, or $6,450 as a family. And if you’re age 55 or older, you can save an extra $1,000. Contributions are pretax and qualified withdrawals are also income tax free. Some employers are contributing to these accounts on behalf of their employees.

Strategy 2: Manage capital gains and dividends

Minimizing exposure to the capital gains tax is even more important for some taxpayers, given the increase in the top rate to 20%, along with the new 3.8% Medicare surtax on net investment income. Taxpayers in the highest income tax bracket could owe as much as 23.8% in tax on their net investment income.

Be careful when selling highly appreciated assets, such as stocks, land, fine art, precious metals (including certain ETFs that invest in them), or antiques. Some of these are taxed as collectibles and are subject to higher capital gains taxes. A large capital gain could push you into a higher marginal income tax rate.

No matter what rate you pay, tax-efficient investing can be a smart strategy. One popular method for reducing taxable income is investing in municipal bonds or municipal bond funds whose earnings are not subject to federal tax. There are even municipal bond funds that seek to avoid exposure to the alternative minimum tax (AMT) as well. Another option is to consider tax-managed funds that keep capital gains and dividend payouts low.

Tax-loss harvesting is another possibility. If your investments have done well this year—as many investors’ have—you might want to consider selling securities that have lost value to help reduce capital gains elsewhere in your portfolio. If you end up with more capital losses than gains, you can use the remaining losses to offset ordinary income by up to $3,000, or you can carry them forward to offset capital gains and ordinary income in future years.

Be careful, however, not to put your desire to lower your taxes ahead of sound investing strategy. Typically, you should harvest losses only from depreciated assets that you were considering selling anyway, perhaps because they no longer fit into your diversified portfolio or because you anticipate that they will continue to decline in value. Here’s a hypothetical example. John is in the 15% capital gains tax bracket and has a long-term capital gain of $5,000 in Investment A, and a long-term capital loss of $3,000 in Investment B. Because, he can offset the $5,000 gain with a $3,000 loss, his net long-term gain on the sale of Investment A and Investment B is only $2,000, with a $300 federal capital gains tax. If he did not have the loss, the tax on his $5,000 long-term gain would be $750.

Strategy 3: Be charitable

Another way to reduce your taxable income is to give to charity. It could be even more valuable if you donate highly appreciated assets that you have owned for at least a year. You could claim the current fair market value as a tax deduction (up to the allowable limits) without having to realize the gain as income on your tax return.

This is a hypothetical example for illustrative purposes. Chart assumptions: Donor is in the 39.6% federal income bracket with an AGI of $500,000. State and local taxes, the federal alternative minimum tax, and limitations to itemized deductions applicable to taxpayers in higher income brackets are not taken into account. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any. Availability of certain federal income tax deductions may depend on whether you itemize deductions. Charitable contributions of capital gains property held for more than one year are usually deductible at fair market value. Deductions for capital gains property held for one year or less are usually limited to cost basis. Please consult your tax adviser regarding your specific legal and tax situation. Information herein is not legal or tax advice.

Consider this hypothetical example (shown in the chart to the right). Bill and Margaret own securities with long-term unrealized gains. They need to decide which giving strategy will work best: giving the securities directly to the charity (Scenario 1) or selling the securities and donating the proceeds to charity (Scenario 2). Let’s compare the potential tax benefits of each side by side.

If they sell the securities first, Scenario 2, and then donate the proceeds to charity, Bill and Margaret will pay a federal long-term capital gains tax of $7,140.

Now let’s look at what happens if they give their securities directly to their favorite charity (Scenario 1). With a direct donation to charity, the capital gains tax from selling the securities no longer applies. Bill and Margaret’s federal income taxes are reduced by an extra $9,967 and the charity receives an additional $7,140. Bill and Margaret will usually save more in taxes and do more good for their designated charity if they donate appreciated securities, instead of cash. On the flip side, if these long-term securities were at a loss, it might be better to sell the security first, realizing a loss (which could be used to offset future gains or income), and donate the proceeds as cash to potentially receive a charitable deduction.

A donor-advised fund, or DAF, enables you to maximize the allowable tax benefits and create a reserve of money that you can use now and ongoing to support charitable causes. For example, if you’re fortunate enough to have high capital gains or particularly high income in 2013—for a bonus, sale of a business, or Roth IRA conversion, for instance—you could contribute a large lump sum to a DAF (including a highly appreciated asset) to claim the tax-lowering charitable contribution this year, then have the fund spread out distributions to the charities of choice on a timetable that works for you.

If you’re age 70½ or older, another charity-related tax strategy to pay attention to this year is a provision that allows IRA owners to make a tax-free distribution to a qualified charity. Under current law, this provision will expire at the end of 2013, so you might not have another opportunity. Many retirees find this to be an attractive strategy because they claim the standard deduction rather than itemizing, which means they don’t typically receive a tax benefit for their charitable contributions. Plus, qualified distributions, up to $100,000, can count as a retiree’s minimum required distribution for the year. (Note: You cannot donate a tax-free IRA distribution to a DAF.)

Strategy 4: Bunch and accelerate deductions

Several significant deductions that are on the books for 2013—but not beyond—include:

State sales tax deduction in lieu of state income tax deduction. This is popular in states with low or no state income tax.

Exclusion for debt forgiveness on foreclosed homes. Homeowners who were caught up in the foreclosure crisis are allowed to exclude up to $2 million (couples) or $1 million (singles) in debt that was forgiven on their principal residence.

Educator expense deduction. Qualified educators are allowed to deduct up to $250 in unreimbursed expenses for books, supplies, and other materials used in their classrooms.

Residential energy property credit. You may claim a tax credit of 10% of the cost of qualified energy-saving improvements to your principal residence.

Although they’ve been renewed before, there’s no guarantee that these provisions will continue to be available. You may want to consider taking these deductions for 2013. For example, if you take advantage of the sales tax deduction and you know you’re going to be making a major purchase in the next few months, you might want to do so before the end of the year. Or if you’re in the middle of a foreclosure proceeding, you should do what you can to ensure that it’s completed in 2013.

In the past, only your medical expenses that exceeded 7.5% of AGI were deductible, but that increased to 10% for this year, making the deductibility threshold harder to reach. There is an exception, however. People age 65 and older can continue to deduct medical expenses that exceed the 7.5%, through 2016.

Strategy 5: Use your annual gift tax exemption

If you’re looking for ways to help your children or other family members, you may want to consider several gifting options to help reduce or avoid federal gift and estate taxes. An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate. This may include cash, stocks, bonds, and portions of real estate. This is your annual gift tax exemption, and you can also give a separate $5.25 million, per person, over the course of your lifetime or at death, free from gift or estate taxes. However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information. Separately, you can pay college tuition costs or eligible medical expenses directly for someone else and avoid having those amounts count as a taxable gift. For more information, speak with your tax adviser and review IRS Publication 950, Introduction to Estate and Gift TaxesOpens in a new window..

If you would like to contribute money toward your child’s education, consider a 529 plan account. You can contribute up to $14,000, the annual gift tax exemption, to the account as a single filer, or $28,000 for a married couple filing jointly. Your contributions are generally considered to be removed from your estate, even though you control the assets and their distribution. There are also accelerated transfers available, whereby you can contribute up to $70,000 (for single filers) or $140,000 per married couple. This “front-loaded” contribution can be spread out over five years for tax purposes. You can also make a payment directly to an educational institution and pay no gift tax.1 And with 529 plans, you have the flexibility to change the account beneficiary. So if a particular child decides not to attend college, you as the account owner can change the beneficiary to a sibling, cousin, or other qualified family member.

Make your moves before December 31, 2015

There have been many significant and permanent changes to the federal tax code for 2013, so don’t wait until it’s too late to implement strategies that can potentially save you money when you file your 2013 tax return. A key is to work with professionals who understand how the new provisions affect your personal and financial situation.

Capital gains (the money made from selling a non-inventory asset like stocks, bonds, property, and precious metals at a profit) are often taxed at fairly high rates — especially if you already have a high income. For instance, in the United States, people with very high incomes (over $400,000 for single, $450,000 for married filing jointly) can expect to pay a 20% capital gains tax.[1] Many states add additional taxes on top of this base federal rate. Luckily, there are several ways to avoid some or even all of your capital gains tax. Usually, these involve putting enough of your money in a tax-safe investment so that you get some use out of your money rather than having to give it to the government.

Method 1 of 3: Redirecting Your Income

1Put more of your income into retirement accounts. Most reputable retirement accounts are tax-exempt or tax-deferred — that is, you either don’t pay taxes on money you put into the account or you only have to pay them once you start withdrawing money from the account after you retire.[2] In either case, capital gains you funnel into a retirement account won’t be taxed immediately. For tax-deferred accounts, though you will eventually have to pay taxes, they will probably be lower than you initially would have had to pay (assuming your retirement income + withdrawals from your retirement account amounts to an income in a lower tax bracket).

Note, however, that most retirement accounts have a limit to how much you can add. For instance, a traditional 401k has a deposit limit of $17,500 per year.

Open a college savings account. If you’re interested in saving for a child or grandchild’s education while simultaneously avoiding capital gains tax, a college savings account is the way to go. 529 college savings plans operate on a tax-deferred basis like many retirement accounts. As an added bonus, they don’t usually have a regular contribution limit like most retirement accounts do. Instead, they have a lifetime maximum amount — usually at least $200,000.[4]

3Put your money in a health savings account. Health savings accounts (HSAs) are just what they sound like — savings accounts that allow people to save for future medical expenses. Usually, money in these accounts is tax-exempt if it’s withdrawn for medical purposes, making these a great choice for people looking to avoid capital gains. However, HSAs usually have several qualifying conditions that a person looking to open an account must meet. These usually include:[5]

Having a qualifying high-deductible health insurance plan

Put your assets in a charitable trust. For someone with a highly-valuable asset subject to appreciation (like, say, a collection of fine antiques), charitable trusts offer a great way to avoid paying capital gains on the sale of the asset. Generally, in this case, you give the trust your valuable asset, then the trust sells it for you. Because charitable trusts are tax-exempt, they don’t have to pay capital gains taxes on the sale of the asset. After this, the trust pays you a certain percentage of the cost of the asset each year for an agreed-upon amount of time. After this, the money left over goes to charity.[6]

To be clear, this method may not earn you as much money as you might from selling the asset yourself and keeping all of the money, even after taxes. However, it does ensure that all of the money from selling the asset is split between you and a charity of your choice, rather than going to the government.

Method 2 of 3: Avoiding Taxes on General Gains

Hold on to your stocks. Capital gains result when you sell capital assets at a greater price than what you bought them for. If you don’t sell your assets, you don’t have to pay any tax. So, if you’re thinking of selling some stocks, always remember that you have the option to hold onto them until a later date. [7]

By waiting to sell, there’s a possibility that you may be able to get a better price for the stocks in the future. However, it’s also possible that the price of the stocks may decline over time.

2Make gifts to family members. Every year, you are allowed to give $14,000 in tax-excluded gifts per individual recipient. If you give valuable stock to a trusted family member like a parent, child, or sibling, they can sell it for you and consequently pay as little as 0% in capital gains taxes (as long as their income puts them in a low tax bracket).[8]

Obviously, you’ll only want to use people that you absolutely trust. Giving someone stock or assets as a gift gives them legal possession of them, so, if there’s any doubt in your mind about whether someone will give you your money back, choose someone else.

3“Harvest” losing stocks. In some situations, selling a stock for a short-term loss can actually save you money in the long term by reducing the amount of money you pay in capital gains taxes overall. This is called “harvesting” your loss. For instance, if someone invests $10,000 in one company’s stocks and the stock soon falls to $9,000, they may decide to sell, taking the $1,000 loss. Then, they will re-invest this money into a different stock. However, they can still use this $1,000 to offset other gains on their tax return. If the second stock does well, it’s possible to have a greater return rate on your initial investment than you would have had by simply buying one stock and waiting for it to recover.[9]

Note, however, that the IRS has enacted certain financial rules that can make this process difficult. For instance, your initial loss is disallowed if you use the money from the sale to purchase a very similar asset within 30 days

Leave capital to others in your will. If you are elderly and have no immediate need for the capital you have accumulated, you may want to consider leaving it to a loved one in your will. When inherited capital is sold, the fair market value at the time of your death is used as the basis for any capital gains . Thus, the only gains that are taxable are the increases in value after the date of death. These gains can often be minimal, especially if the assets are sold soon after death.

Move to a tax-friendly state. As noted above, the base federal rates for income taxes are the same for every American and vary based on your taxable income. However, many states include their own capital gains taxes on top of the base federal tax. To minimize the amount of money that you have to pay in taxes, moving to a state with a lower state-level capital gains tax (or none at all) can be a smart long-term option. Though the process of moving to a different state can require a serious investment of time and money, it may make sense for people who stand to make a great deal of money from capital gains over the course of their life.

Seven states have no additional taxes on top of the federal rate: Alaska, Florida, South Dakota, Tennessee, Texas, Washington and Wyoming. California has the highest rate of any state, with a top rate of about 37%.

Method 3 of 3: Avoiding Taxes on Property

Use a like-kind exchange on property worth more than the depreciated value.If you sell property for more than the depreciated value, you will pay capital gains tax on the difference between the depreciated value and the sale price. However, you can use a like-kind exchange at the higher value of the property to avoid capital gains tax. For example, if you have used equipment worth $5,000, but the depreciated value of the equipment is only $3,000, you can trade it in for $5,000 to buy new equipment, instead of selling it outright and paying capital gains tax on the $2,000 difference.

Exclude capital gains on the sale of residential property. Individuals or families selling their primary place of residence may be exempt from paying taxes on much (or even all) of the money made from the sale of the home. Using this strategy, an individual can exclude up to $250,000 in capital gains, while a couple filing jointly can exclude up to $500,000. However, to be eligible for this sort of exemption, you must meet certain ownership requirements: [12]

  • You must have owned the residential property for a minimum of 2 years.

  • You must have occupied the property as your primary residence for at least 730 days (2 years), which don’t need to be consecutive, during a 5-year period prior to the sale. You are allowed to rent the residence during the period that you don’t live in it.

  • During the 2-year period prior to selling the property, you must not have excluded the gain on the sale of another home.

  • Invest in property improvements. Certain eligible home improvement projects used to get a home in selling shape can be used to reduce (or even eliminate) the capital gains tax on the sale of a home. These IRS-approved projects can effectively count against the sale price of the home, reducing the amount of money you owe in capital gains taxes. If the combined cost of these property improvements makes the effective price of the sale less than $500,000 for couples filing jointly or $250,000 for individuals, no capital gains taxes need to be paid at all. Approved expenses are listed in IRS publication 523 and usually include:[13]

  • Tips:

Military personnel and people in certain other specified government positions, who must live elsewhere for work, may have difficulty meeting the 2-year use test during a 5-year period. Therefore, these people have the ability to suspend the 5-year period while they are away for up to 10 years.

If you don’t meet the requirements of the ownership test and use test to avoid capital gains tax on the sale of residential property, you may be able to claim a partial exclusion if you were to sell due to unforeseen circumstances, such as a change in job location or health.


If you leave a large estate to others in your will, there may be inheritance tax due at the date of death.

Sources and Citations




How gifting are taxed by Intuit

If you give people a lot of money, you might have to pay a federal gift tax. But the IRS also allows you to give up to $14,000 in 2013 to any number of people without facing any gift taxes, and without the recipient owing any income tax on the gifts.
Why it pays to understand the federal gift tax law

If you give people a lot of money or property, you might have to pay a federal gift tax. But most gifts are not subject to the gift tax. For instance, you can give up to the annual exclusion amount ($14,000 in 2013) to any number of people every year, without facing any gift taxes. Recipients generally never owe income tax on the gifts.

In addition to the annual gift amount, your can give a total of up to $5.25 million starting in 2013 in your lifetime before you start owing the gift tax. If you give $16,000 each to ten people in 2013, for example, you’d use up $20,000 of your $5.25 million lifetime tax-free limit—ten times the $2,000 by which your $16,000 gifts exceed the $14,000 per-person annual gift-free amount for 2013.

The general theory behind the gift tax

The federal gift tax exists for one reason: to prevent citizens from avoiding the federal estate tax by giving away their money before they die.

The gift tax is perhaps the most misunderstood of all taxes. When it comes into play, this tax is owed by the giver of the gift, not the recipient. You probably have never paid it and probably will never have to. The law completely ignores gifts of up to $14,000 per person, per year, that you give to any number of individuals. (You and your spouse together can give up to $28,000 per person, per year to any number of individuals.)

If you have 1,000 friends on whom you wish to bestow $14,000 each, you can give away $14 million a year without even having to fill out a federal gift-tax form. That $14 million would be out of your estate for good. But if you made the $14 million in bequests via your will, the money would be part of your taxable estate and, depending on when you died, might trigger a large estate tax bill.

The interplay between the gift tax and the estate tax

Your estate is the total value of all of your assets, less any debts, at the time you die. The new rules for 2013 will tax estates over $5.25 million at rates as high as 40%. That $5.25 million is an exclusionmeaning the first $5.25 million of your estate does not get taxed.

So why not give all of your property to your heirs before you die and avoid any estate tax that might apply? Clever, but the government is ahead of you. As noted above, you can move a lot of money out of your estate using the annual gift tax exclusion. Go beyond that, though, and you begin to eat into the exclusion that offsets the bill on the first $5.25 million of lifetime gifts. Go beyond the $5.25 million and you’ll have to pay the gift tax—at rates that mirror the individual income tax, up to 40% in 2013.

The basic tax basis issue

As you consider making gifts, keep in mind that very different rules determine the tax basis of property someone receives by gift versus receives by inheritance. For example, if your son inherits your property, his tax basis would be the fair market value of the property on the date you die. That means all appreciation during your lifetime becomes tax-free.

However, if he receives the property as a gift from you, his tax basis is whatever your tax basis was. That means he’ll owe tax on appreciation during your life, just like you would have if you sold the asset yourself. The rule that “steps up” basis to date of death value for inherited assets saves heirs billions of dollars every year.

A tax basis example

Your mother has a house with a tax basis of $60,000. The fair market value of the house is now $300,000. If your mother gives you the house as a gift, your tax basis would be $60,000. If you inherited the house after your mother’s death in 2013, the tax basis would be $300,000, its fair market value on the date of her death. What difference does this make? If you sell the house for $310,000 shortly after you got it:

  • Your gain on the sale is $250,000 ($310,000 minus $60,000) if you got the house as a gift.
  • Your gain on the sale is $10,000 ($310,000 minus $300,000) if you got the house as an inheritance.
What is a gift?

For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren’t paid back, at least not fully, it’s a gift.

In 2013, you can give a lifetime total of $5.25 million in taxable gifts (that exceed the annual tax-free limit) without triggering the gift tax. Beyond the $5.25 million level, you would actually have to pay the gift tax.

Gifts not subject to the gift tax

Here are some gifts that are not considered “taxable gifts” and, therefore, do not count as part of your $5.25 million lifetime total.

  • Present-interest gift of $14,000 in 2013. “Present-interest” means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. In 2013 you could give amounts up to $14,000 to each person, gifting as many different people as you want, without triggering the gift tax.
  • Charitable gifts
  • Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $143,000 in 2013. This amount is indexed for inflation and can change each year.
How gifts to minors are taxed

If you give an amount up to $14,000 to each child each year, your gifts do not count toward the $5.25 million of gifts you are allowed to give in a lifetime before triggering the gift tax. But what counts as a gift to a minor?

  • Gifts made outright to the minor
  • Gifts made through a custodial account such as that under the Uniform Gifts to Minors Act (UGMA), the Revised Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act (UTMA)

Note: One disadvantage of using custodial accounts is that the minor must receive the funds at maturity, as defined by state law (generally age 18 or 21), regardless of your wishes.

A parent’s support payments for a minor are not gifts if they are required as part of a legal obligation. They can be considered a gift if the payments are not legally required.

Example: A father pays for the living expenses of his adult daughter who is living in New York City trying to start a new career. These payments are considered a taxable gift if they exceed $14,000 during 2013. However, if his daughter were 17, the support payments would be considered part of his legal obligation to support her and, therefore, would not be considered gifts.

Advantages of making a gift

Giving a gift may earn you more than gratitude:

  • Reduced estate taxes. Moving money out of your estate via lifetime gifts can pay off even if those gifts trigger the gift tax. How? By removing future appreciation on the asset from your estate. Say, for example, that you give your daughter real estate worth $5,264,000, using up your $14,000 exclusion and your entire $5,250,000 2013 lifetime gift exclusion. If the property is worth $7,014,000 when you die, that’s $1,750,000 less to be taxed in your estate.
  • Reduced income taxes. If you give property that has a low tax basis (such as a rental house that has depreciated way below its fair market value), or property that generates a lot of taxable income, you may reduce income taxes paid within a family by shifting these assets to family members in lower tax brackets.
  • Teaching your family to manage wealth. Giving family members assets now allows you to monitor their ability to handle their future inheritance.
Disadvantages of making a gift
  • Reduces your net worth. You need to keep enough assets to care for yourself throughout a long or extended retirement or illness.
  • The Kiddie Tax. Giving funds to children may subject them to the Kiddie Tax, which applies the parents’ tax rates to investment earnings of their children that exceed a certain amount. For 2013, the Kiddie Tax applies to investment income exceeding $2,000 for a child under age 19.
How to report and pay the gift tax

If you make a taxable gift, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return, which is due April 15 of the following year. Even if you do not owe a gift tax because you have not reached the $5.25 million limit, you are still required to file this form if you made a gift that exceeds the $14,000 annual gift tax exclusion level. The IRS needs to keep a running tab of your lifetime exemption.

Example 1

In 2013, you give your son $15,000 to help him afford the down payment on his first house. This is a gift, not a loan. You must file a gift tax return and report that you used $1,000 ($15,000 minus the $14,000 annual exclusion) of your $5.25 million lifetime exemption.

Example 2

Same facts as above, except that you give your son $13,000 and your daughter-in-law $2,000 to help with the down payment on a house. Both gifts qualify for the annual exclusion. You do not need to file a gift tax return.

Example 3

Same facts in Example 1, but your spouse agrees to “split” the gift—basically this means he or she agrees to let you use part of his or her exclusion for the year. One spouse, for example, could give $28,000 to his son without triggering the gift tax if the other spouse agrees not to give the son any gift that year. Although no tax is due in this situation, the first spouse would be required to file a gift tax return indicating that the second spouse had agreed to split the gift.

Forms, publications and tax returns

Only individuals file Form 709: U. S. Gift (and Generation-Skipping Transfer) Tax Return—there’s no joint gift tax form. If a both spouses each make a taxable gift, each spouse has to file a Form 709.

On a gift tax return you report the fair market value of the gift on the date of the transfer, your tax basis (as donor) and the identity of the recipient. You should attach supplemental documents that support the valuation of the gift, such as financial statements in the case of a gift of stock in a closely-held corporation or appraisals for real estate.

If you sell property or family heirlooms to your child for full fair market value, you don’t have to file a gift tax return. But you may want to file one anyway to cover yourself in case the IRS later claims that the property was undervalued, and that the transaction was really a partial gift. Filing Form 709 begins the three-year statute of limitations for examination of the return. If you do not file a gift tax return, the IRS could question the valuation of the property at any time in the future.

For more information on the gift tax, see IRS Publication 559: Survivors, Executors, and Administrators.

  • —————-
  • Call Connie Dello Buono, CA Life Lic 0G60621 at 408-854-1883 to gift your family using a permanent life insurance. Parents and grandparents can give a gift using life insurance for tax purpose. Contact your Estate planner and CPA to help you navigate with gifting. You may gift a gift to your favorite non-profit such as Motherhealth Inc for affordable senior care , 1708 Hallmark Lane San Jose CA 95124
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