Caught in Between
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More Financial Advice for the Sandwich Generation
By Jennifer Sudick
Unpaid family caregivers often give a lot, but when tax time rolls around, they are also entitled to a few breaks, says Brad Konishi, a certified public accountant in Honolulu.
Head of household: Generally, filing as head of household means lower tax rates than married filing separately or single filers. To file as head of household, there are three basic requirements: The filer must be “considered unmarried” by the IRS on the last day of the year; pay more than half the cost of keeping up a home for the year; and a qualifying person must have lived with the filer for more than half of the year, except if the qualifying person is a dependent parent.
A person who is single and living on their own can qualify as head of household if they are paying to keep up the household of the parent.
Married couples who file jointly generally have the lowest tax rates, so it is almost always a better option to file with the married filing jointly status rather than as head of household, Konishi says.
Medical tax deduction: When children live in the same home as an elderly parent, and pay for capital improvements for the home for the medical benefit of the parent, such as adding a wheelchair ramp or handrails, it may be possible to get a medical tax deduction on some of the costs. Just take the cost of the improvement and subtract out the resulting increase in property value; the remainder would be the amount of the medical deduction. This deduction is available to all taxpayers regardless of their filing status.
College versus care
The financial strain of the “sandwich generation” often means a choosing how to spread resources between college costs for children and long-term care for parents.
It’s important for people to align dollars with the priority, says Eric Fujimoto of Ameriprise Financial Services Inc.
Ask: What if I pay everything for school out of pocket? What if I pay everything for my parents out of pocket? Is the end result acceptable? If it is, accept the risk of long-term care payments and college costs; if not, transfer the risk, he says.
To help defray college or private-school costs, consider federal tax credits available for college students or their parents. Tuition and education deductions exist for parents of students as well.
Normally there is a $13,000 gift limit, but there is no limit by a family member when they are paying directly to an educational institution for tuition costs.
Ethan Okura of Okura & Associates suggests setting aside money into a 529 educational savings plan designated for a child or other family beneficiary. That money will grow tax free, and it will come out tax free if used for qualified educational purposes.
Functioning like a Roth IRA, the beneficiary can change if the designated child does not attend college. Each state has a plan, and many colleges have a plan.
When qualifying for Medicaid, there is a five-year look-back period on gift-giving, so someone considering that option would need to plan ahead when looking to leave an inheritance, Ethan Okura of Okura & Associates says.
Parents should also consider a life estate – the right to use their home for the rest of their life – where both the child and parent are on the title, and ownership by the child is a future right after the parent dies, he says.
A legacy trust can be used when leaving assets to children, he says. Also called a generation-skipping trust, the parent can take assets out of the trust or use assets that are included in the trust. Those assets are protected against creditors or a divorcing spouse, as well as estate taxes.
“Remember that estate planning is an ongoing process, so even if they have done something in the past, it is important to check back every five years or so,” he says. “Generally for boomers, they are right at the age to start looking seriously at planning.”