AN INTERESTING TAX WITHHOLDING STRATEGY

I learned an interesting tax withholding strategy from a client who resides in a “life care” assisted living facility a couple of years ago.

 

First of all – what do I mean by a “life care” facility?  SENIOR HOMES.COM explains “What are Life Care Communities?” -

 

“Life care is one type of Continuing Care Retirement Community (CCRC) that provides independent living, assisted living and nursing home care.”

 

And - 

 

“Life care communities are different from other senior housing options in that they require a long-term, upfront financial commitment that, in turn, guarantees housing, services and nursing care all in one location through the end of life.

 

In contrast to fee-for-service contracts, life care residents pay a large initial deposit plus a monthly maintenance fee that stays nearly the same no matter how much care is needed.”

 

My client, a retired couple, paid a very, very substantial “up-front fee” (in the hundreds of thousands of dollars).  And each month their net Social Security and pension checks are paid directly to the facility as monthly “maintenance” fees.  A resident or a resident’s estate may receive a partial refund of the “up-front” fee is he or she leaves the facility or passes.

 

Residents of my clients’ facility receive a private room with bath, 3 meals served in the dining room, housekeeping, laundry, and all medical care paid for by the facility.  There are also planned trips and in house activities, 2 beauty parlors, an on premise bank, billiards, ballroom/theater, arts and crafts, exercise equipment and classes, library and chapel.  All this is included in the upfront and monthly fees.

 

So basically the couple has no living expenses, as just about everything, including all medical care and prescriptions, are provided by the facility without additional charge.

 

If the health of my clients deteriorates and nursing care is required it is provided within the same facility.

 

As I explain in my MEDICAL EXPENSE GUIDE you can deduct as a medical expense on Schedule A -

 

“The ‘lump-sum’ entrance fee paid to a ‘life-care’ or ‘continuing-care’ facility that is specified in the residential agreement as a condition for the facility’s promise to provide lifetime care that includes medical care.  The qualifying amount may be deducted in full in the year it is paid, even though the medical care will be provided in the future.”

 

The husband, a retired municipal employee, receives a monthly pension from the State.  He has elected to have both federal and state income tax withheld from his monthly pension check.

 

A few years ago I told my client that, due to a pension exclusion and high filing threshold the state tax return, as long as his situation does not change, or he does not win the Publishers’ Clearing House sweepstakes, he will no longer need to file a state income tax return each year – and that he was only filing a state return to get a full refund of all the state income tax withheld.  I suggested that he stop having state income tax withheld from his pension.  I also told him that he could reduce the amount of federal income tax withheld.

 

My client told me that he wanted to get the federal and state refunds each year.  Since the facility got the total amount of his monthly pension and Social Security checks, and he no longer had a monthly income, he used the refunds from the excess withholding to get some in pocket “spending money”.  Unlike the monthly benefit checks, the refund checks went to him and his wife and he could cash these checks and pocket the money.

 

So – it is something to think about if you, or a relative, are in a similar situation.

 

TTFN