Q: My mother has been in a nursing home for the last eight years. She is enrolled in the Medicaid long-term care program, so her Social Security and pension checks are turned over to the nursing home each month. She receives a personal-needs allowance of $50.
Her adjusted gross income is $45,000, but when she takes allowable deductions and exemptions, including the deduction for itemized medical expenses, she has no federal income tax liability. However, after filing her state personal income tax return, she owes Rhode Island $1,170. How can she pay this tax bill when her net income is $50 a month?
A: Your question spans three different, but related, issues: federal income tax, state income tax and Medical Assistance (Medicaid) long-term care. Looking at each issue in order will help answer your question.
Internal Revenue Service rules require that a single person age 65 or older must file a federal tax return for 2013 if his/her gross income exceeds $11,500. Adjusted gross income is total gross income minus specific reductions, such as alimony payments made to a former spouse, contributions to certain retirement accounts or interest derived from certain types of bonds.
Taxable income is adjusted gross income minus itemized deductions and personal exemptions. The IRS allows a tax deduction for qualified medical expenses that exceed 10 percent of adjusted gross income. There is a temporary exemption, from Jan. 1, 2013 through Dec. 31, 2016, for individuals who turned 65, or whose spouse turned 65 during the tax year, that sets the qualified medical expense deduction threshold at 7.5 percent of adjusted gross income.
The IRS allows the deduction for nursing home expenses, including meals and lodging, if the primary reason for being in a nursing home is for medical care. If the person is in a nursing home for personal care, the IRS allows a deduction only for the cost of the medical care.
In your mother’s case, her total deductions, including medical expenses and personal exemption, probably resulted in no federal income tax liability. For more information about medical expenses and other deductions, contact the IRS at (800) 829-1040, or go to irs.gov.
In 2011, Rhode Island changed its personal income tax structure. When the state income tax became effective in 1971, it was a “piggyback” based system; state personal income tax was a percentage of your federal income tax. Generally, you received credit for deductions and exemptions reported on your federal income tax return.
Most likely, if you didn’t have a federal income tax liability, you had no state income tax liability. According to the Rhode Island Division of Taxation, one of the changes that took effect for 2011 and after eliminated the option to itemize deductions, including the medical expense deduction.
The new law effectively reduced the top marginal tax rate; broadened the lower-rate income brackets; reduced the number of tax brackets; introduced a single, uniform set of tax brackets; eliminated the state alternative minimum tax; and expanded the standard deduction. The Division of Taxation declared that these changes benefited more than 60 percent of Rhode Island taxpayers, mostly in lower income brackets.
As you saw, however, eliminating itemized deductions, such as medical expenses, created a new reality; it’s possible to owe no federal income tax and still have a state personal income tax liability. That’s why your mother owes $1,170 in state income tax. (For more information on state personal income taxes, call the Division of Taxation at (401) 574-8829, or go to tax.ri.gov.)
Here’s the good news. The state administration realized that these changes could affect Medicaid long-term care clients who were using most of their income to pay for nursing home care. In other words, you might not be able to pay state personal income taxes and contribute to the cost of nursing home care. The Executive Office of Health and Human Services has developed a process that allows Medicaid long-term care clients, such as your mother, to decrease the amount they contribute to their care by the amount of the state income tax liability. Based on information provided by that agency, here’s an outline of the process:
The state tax liability must be directly related to the change in law regarding the deduction of medical expenses. The tax liability must be paid first. You will have to send the following documentation to your mother’s long-term care caseworker at the Department of Human Services field office:
A letter indicating that the state tax liability is a direct result of the inability to deduct medical expenses.
A signed and dated copy of her R.I. 1040 tax return that shows the tax owed.
A copy of the check or proof of electronic transfer that paid the tax liability.
A copy of the bank statement showing that the check was cashed, if applicable.
If necessary, submit a copy of Power of Attorney Form 2848.
The caseworker will review the documentation. If all the information is acceptable, your mother’s patient liability to the nursing home will be decreased in the amount equal to the tax liability payment. For instance, let’s say that your mother has a patient liability of $2,100 each month that she pays the nursing home directly. She has a state income tax liability of $1,170 that she pays in April. If the only funds she has to pay her taxes are the same funds she uses to pay the nursing home, she would pay the state $1,170 for the tax bill owed and the difference of $930 ($2,100 minus $1,170) to the nursing home for the April bill. The state will then reimburse the nursing home for the unpaid patient liability of $1,170 that she paid in state personal income tax.
This is a shared article written by Larry Grimaldi is the chief of program development at the Rhode Island Department of Human Services, Division of Elderly Affairs and published in the Providence Journal on September 22, 2014. CLICK HERE to see the original article.