It happened again today. One of my clients said, “We have lost so much in our mutual funds that I should just sell EVERYTHING and start over.”  I asked him, “How do you know that you have a taxable loss?”  He looked at me and replied, “Everybody knows that the whole market is down by at least 40%! That’s how I know.”

Many seniors are panicking and making big mistakes in dealing with investment losses.  The two main errors made are:

• Thinking that perceived investment losses are the same as tax losses; and
• Failing to understand that any withdrawal from an IRA, 401(k), or 403(b) will always be treated as ordinary income. 

In today’s blog we’ll tell you how to avoid falling into these two traps.

The loss our client feels is what I call the “the quarterly statement loss,” but it is not usually the same as a taxable loss. If you ignore Mr. Taxman’s rules, you could wind up compounding your losses.  The way to compute a taxable loss is to look up what you originally paid for an asset and compare that purchase price to the current sale price.  Let’s say that your rental property would sell today for $200,000, but in 2007, it would have sold for $300,000. What kind of a loss have you suffered?  Does the tax-man think that you have a loss?  The answer is, no!

If you bought your investment real estate at $300,000 in 2007, and in 2009 you sell at $200,000, then Mr. Taxman will agree that you have a long-term capital loss of $100,000 (please assume that we are ignoring depreciation and other adjustments).

But, if you are like most of my senior clients, you may have purchased the asset a long time ago at a price that is lower than today’s sale price.  If you sell today, you may have a significant tax bill, even though you feel like you have ‘suffered’ a loss of value.

For example, if you bought the rental property in 1975 for $50,000, the actual gain or loss will be computed from the original sales price (less any depreciation that you took as a deduction on an annual basis) compared to the current sales price.  So, if you sell that property now, you will be looking at a significant taxable gain. 
 
The tax loss magnification is even greater when someone tries to cash out their perceived losses in an IRA.  My friend Rudy Beck, a St. Charles, Missouri elder law attorney, recently shared a horrifying story of how a 58-year-old client created a taxpayer’s nightmare because she cashed out her IRA due to her perceived losses.  The client’s “very knowledgeable” daughter had advised her to sell 100% of her IRA investments.  She liquidated $150,000 of mutual fund investments with the expectation that she had a “$55,000 loss.”  Attorney Beck had to tell her that she had created 2008 taxable ordinary income of $150,000 AND a 10% early withdrawal penalty of $15,000.  It’s critical that you remember that money in your IRA represents deferred wages.  No matter when or how the money comes out of your IRA, it will be treated as if you are now receiving those wages.  You pay the income tax rate to the federal and state government.  The government never allows you to treat IRA withdrawals as a tax loss.

The majority of people have better things to do in life than study either investments or taxes, so please seek the advice of tax professionals before you assume that your “investment losses” are also “tax losses.”

Juanita Matby and Gordon Newman, February 21, 2008 Tigard High School

I had never heard of a senior citizen senior prom until last week.  But in the spirit of St. Valentine’s Day, with its celebration of youthful romantic love, I decided to learn “What the heck is a senior senior prom?!”  What I discovered is a delightful idea that combines the youthful energy of high school and college students with the timeless wisdom of our elders.

We all know the indispensable ingredients of a prom which can transform an average evening and high school gymnasium into a magical wonderland.  Happily, some high schools and colleges have begun to encourage their senior students to host a senior citizen prom, or a “senior senior prom.”  A “senior senior prom” gives the prom a whole new significance—but most of the original recipe’s flavors are still there.  Any “senior senior prom” hosted by students will usually include:

• Dress-up clothes and flowers
• Dining and dancing
• The crowning of a prom king and queen
• Plenty of socializing (but now it’s intergenerational!)

The new senior senior prom idea is hot.  High schools, colleges, assisted living facilities, community groups, and even churches have begun to host these remarkable events.  Lizzie Mytty, writing for her college’s Marquette Tribune, wrote, “When the music started playing, students and seniors alike crowded the dance floor to do the twist, dance to the electric slide, and form conga lines.”  She went on to add, “It’s a success in… connecting students and senior citizens.  At the prom, seniors and students dressed in formal wear, talked, laughed, and danced to music from the 1920s to today.”

Encouraging today’s students to host today’s senior citizens and really get to know each other pays big dividends.  Senior citizens and students build bridges of friendship and communication.  Both groups throw away their negative ideas about the other.

If you are interested in helping to kick off a senior senior prom in your community, here are links to a few resources:

The Marquette Tribune
The Astra Chapter of the National Honor Society
The Daily Emerald; “Young at Heart Prom”

If you have ever attended or hosted a “Senior Senior Prom” please comment and tell us all about it, we would love to know more from the readers who are close to our hearts.  And may all of our readers enjoy a happy St. Valentine’s Day!

Have you been wondering if the proposed Obama-Biden “plan to lower healthcare costs and ensure affordable, accessible, health coverage for all” would provide long-term skilled nursing home care for frail seniors?  The short answer is…no! 

The key features of the plan focus on providing access to healthcare to “over 45 million Americans—including over 8 million children” who lack health insurance.  The Obama-Biden Plan has five main strategies: 

1. Invest in electronic health information technology systems
2. Improve access to prevention and proven disease management programs
3. Ensure that health providers deliver quality care
4. Lower drug and insurance costs
5. Reduce insurance costs for catastrophic illness coverage

Here is the principal goal as highlighted on the Obama website:  “Barack Obama and Joe Biden will guarantee affordable, accessible healthcare coverage for all Americans.”  Despite the presence of the seemingly straightforward words “healthcare coverage” and “all” in the sentence above, it’s critical to understand the definition of those words.  When it comes to healthcare and politics, even simple words may not have a common-sense meaning.  “Healthcare coverage” means “payment for acute healthcare costs.”  Acute care is the type of care given to recover from short-term diseases and accidents. 

In the United States, public healthcare payers, such as Medicare and Tri-Care (for retired military) and the private healthcare insurers, reimburse healthcare providers only for acute care and acute illness rehabilitation.  These payers specifically exclude long-term care in a skilled care nursing home.  Care in a skilled care nursing home is defined as chronic care.  Neither Medicare nor private health insurance pay for chronic care in assisted living facilities or nursing homes.  Unfortunately, the bottom line for America’s frail seniors with a long-term illness is that the word “all” (as defined in the Obama-Biden Healthcare Plan) does not include them. 

Sadly, this means that under our current healthcare program and the Obama proposals, the majority of America’s seniors have no alternative but to pay their own nursing home bills.  If you have Alzheimer’s, Parkinson’s, or another long-term illness—you are still on your own.  Even if Obama-care is enacted, you will be required to pay your own tab for long-term healthcare until you are impoverished enough to qualify for Medicaid.

But there are ways to prevent the impoverishment required to qualify for Medicaid, if you plan far enough ahead.  We recommend that boomers and seniors seriously consider long-term care insurance.  And to avoid some of the worst outcomes, please contact an elder law attorney who can help you plan today for better long-term healthcare tomorrow.