May 19, 2013

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Itemized Tax Deductions and Their Limits

April 16, 2013 By

One small advantage of paying taxes is claiming tax credits and deductions; you give with one hand and take with the other one. After all, this is what Uncle Sam does, and if you get the slightest opportunity to claim some sort of tax break of relief in your overall tax liability, take it and run with it.

The availability or value of a tax credit or deduction is dependent on the value of your Adjusted Gross Income (AGI). However, most of the itemized tax deduction approval amounts are based on the percentage of your AGI. Here are some of the common expenses you must never overlook:

Medical Expenses: The medical and dental expenses are the first ones on Schedule A. But, most itemizers don’t claim this deduction because the expenses must surpass 7.5% of your AGI to claim, which is not always easy to meet. To help meet this threshold, consider the following:

·         Travel expenses to and from the medical facility or even chemists to collect your prescriptions. Find out the allowable mileage rate before calculating the expenses.

·         Payments to your insurance plans from your taxed income. This includes a percentage of your long-term premiums

·         Health-related expenses like extra glasses, hearing aids, artificial limbs and some dental treatment.

·         Alcohol or drug addiction rehabilitation and related expenses

·         Doctor-recommended weight loss program

·         Laser vision corrective surgery

This is a very broad category and might include expenses like home renovations for use if wheelchair or even a physician-recommended humidifier that you had to add to the home’s HVAC system to lessen your child’s asthma. Just remember to keep necessary documents and receipts, as it is possible the IRS will ask for them. Read the IRS Publication 502 for a more comprehensive list of eligible medical costs.

Work Related Expenses: You can deduct work-related expenses that weren’t refunded by the employer on Schedule A and miscellaneous expenses if they exceed 2% of the AGI. Qualified expenses include job search expenses, expenses linked to your investments, and even tax preparation costs. Read the IRS Publication 529 for more information on miscellaneous expense deductions.

Charitable Deductions: This is one of the leading itemized deductions but you have to be careful if you are so generous because there are some limits on how much you can donate to charities or groups. You can give up to 50% to nonprofits listed in the IRS 501(c)(3) like churches, education organizations, hospitals and other organizations that rely on the public or the government to fund their operations.

Some of these deductions are a bit complicated and you might require the professional input of a tax pro to successfully claim them on your return.

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Valentine Gifts May Save You Some Money!

February 13, 2013 By

Valentine’s Day is tomorrow and couples look forward to the cake, corny cards, chocolate and candy. Here is another innovative way to sweeten valentines even more: there are gifts that can actually place you at a tax advantage. Consider the following eleven gifts that keep on giving, tax wise!

  1. Buy a vacation house. Costs incurred in purchasing a property can be deducted to reduce your tax bill. Mortgage interest and real estate taxes are deductible on a Schedule A, if itemized. Expenses associated with a second home may also be claimed subject to certain restrictions. And it doesn’t have to be the Biltmore House. A second home includes not only a house but also a condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Yachts are also considered as a second home.
  1. A wedding ring also counts. People love to propose on Valentine’s Day, definitely because it’s the most romantic day of the year. The cost of the ring is not deductible; don’t get too excited! The tax break however, is there ever after. Your filing status is determined as of the last day of the year, so even if you don’t get married until December 31 this year, you can still file as married filing jointly. A lot of negative sentiment surrounds the possibility of a marriage penalty, but in truth, most married couples pay less in taxes as a result of filing jointly. Saying “I do” could actually save you some money!
  1. In the event that you have an outstanding tax debt, it is advisable that you settle it before you can get married. It’s a shame to start a life together marred by tax debts and it may cause all kinds of problems in the long run. Encourage your better half to acquire a tax relief as an ideal and thoughtful gift to yourself!
  1. If you plan to live happily ever after and sail away into the sunset, ensure that that partner is healthy. What better ways to achieve this than having regular checkups and to ensure you are well on the path to good health? The costs of all checkups regardless of age and sex, whether for heart disease, cancer, or heart disease are all deductible if itemized. It does make sense to stay healthy.
  1. Go to school, or take a loved one to school. For 2012, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for your own education or for your spouse (or other dependents).The lifetime learning credit is available for tuition and related expenses at an eligible educational institution. Any school, music, culinary, art or vocational school! An eligible education institution includes any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Enquire if you aren’t sure. Away with procrastinating about that culinary school dream and get with the program! Pursue your passion, and you just might improve your tax position!
  1. An unrivalled means of showing adoration for someone is making a donation in their name. Unsurprisingly, the tax laws make this a win- win situation for all. The charity wins, and you win your sweetie’s heart as well, in addition to a considerable reduction of your tax bill. So support the whales, cancer research, or even an orphanage, and you may claim a deduction for your gift.
  1. Smoking; there was no way to leave that one out. It kills, it’s costly, and is disgusting. Quit now and save loads of money! The cost of participation in a cessation of smoking program and for drugs to combat nicotine withdrawal is a deductible tax expense if itemized. Your other half will thank you, and so will your future self. So stop smoking now!
  1. Care and love is shown in many ways. One of them is by showing a direct concern for your spouse’s future. This can be done by contributing to a spousal IRA, if you are married and earn more than your spouse. If you file a joint return, you can make a contribution to a spousal IRA $5,000 (6000 if your spouse is over 50). Watch out for phase outs though.
  1. Raising a child isn’t easy. Kids are expensive, with all the bills, parties, school, and so on. The tax authorities, luckily, are in on this fact, and have gone a long way into making sure there are some perks associated with parenthood. Increased exemptions and the earned income tax credit are some of the tax breaks, and though they don’t offset the actual costs of raising kids, considering it would be a great way of moving a relationship to a higher level.
  1. Hire a tax professional. It has been statistically proven that most fights among couples are about money. Anything you can do to have a happy marriage is worth the cost, correct? Paying for a tax professional is tax deductible if itemized, and would save you a lot of time… time which you could better spend enjoying your relationship! Seek tax advice and save yourself a great deal of time.
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Self-Employed Workers Health Insurance Deductions

September 18, 2012 By

Self-employed Americans equally need medical coverage, just like the employed do. Even though one can opt to utilize a spouse’s insurance policy, you might want to pay your own medical coverage, as the premiums can be deducted in full on your tax returns. This is one of the above-the-line deductions on the income tax returns on Form 1040, last section of the first page.

This adjustment on income allows eligible self-employed taxpayers not only to deduct their medical expenses, but also their dental and vision policy payments. Also deductable, are the long-term care insurance premiums that are done on Form 1040’s line 29. Also applicable are the insurance premiums that a self-employed worker pays for his/her spouse and dependents. Furthermore, children who were, at the end of 2011, twenty six years or younger are also covered by the deductible insurance, regardless of whether they are the worker’s dependents or not.

To be eligible, the IRS has set a number of requirements that must be met. To begin with, you must be a self-employed taxpayer whose net profit is reported on Schedule C of Form 1040-Profit or Loss from Business; Schedule F, Profit or Loss from Farming or Schedule C-EZ, Net Profit from Business. Also eligible are partners whose self-employment net earnings are reported on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., box 14, code A. Alternatively, a shareholder who owns over 2 percent of the current stock of an S corporation and the wages from the business reported on Form W-2: Wage and Tax Statement.

One of the most important policy requirements is that it has to be established under your business. The policy can either be in your name or that of the business if you file a Schedule C, C-EZ or F. For partners, the policy name can either be of the partnership or the partner. You have the option to pay the premiums yourself or allow the partnership to pay but the premium amounts paid by the partnership must be reported on Schedule K-1 (Form 1065) as definite payments that will be included in the partner’s gross income.

The over two percent shareholders of S corporations can have the premium either in their name or the S corporation’s. Just like the partnership, the S shareholder can pay premiums themselves or let the corporation do it on their behalf. If a shareholder pays the premium amount for a policy that is in his or her name, the amount must be refunded by the corporation and reported on Form W-2 as a wage that will have to be captured in the gross income. Failure to do this will be assumed that the policy is established under your business.

More information is available on the IRS Publication 535, which can be downloaded from the IRS website as a PDF file.

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Some Tax Deductions for Pets You Need to Know

August 21, 2012 By

Americans have a way with pets, exhibited by the passionate uproar whenever an animal is mistreated and the many animal protections campaigns. According to the American Pet Products Association (APPA) National Pet Owners Survey, 62% of U.S households own at least one pet, which amounts to a whopping 72.9 million homes in total. There are 78 million dogs and 86 million cats in American homes.

The APPA survey further reveals that the pet owners spent close to $51 billion on their animals alone in 2011. This figure is expected to shoot to $53 billion in 2012, and it is not likely to drop any time soon. As a result of the Americans’ love for pets, pet supply stores are cropping up in every corner of the country to cater for the overwhelming demand.

Congress has not been left behind in trying to protect American pet owners through the Humanity and Pets Partnered Through the Years, or HAPPY Act. Had this act been enacted, pet owners would be allowed to deduct up to $3,500 for pet care alone. It is unfortunate for pet owners that this act was shot down, to the disappointment of many.

The IRS has always maintained that pet owners have no ground to claim their pets as dependents. However, there are cases when pet-related expenses can be deducted.

Pets as Medical Deductions: Pet owners can include as medical expenses the cost of buying, training, and keeping a service or guide dog or other pet to help the visual or hearing impaired persons, or people with other disabilities. These costs include food, grooming, veterinary, health, vitality, and any other maintenance costs to ensure that the animal performs its duties well.

Pets as a Business Cost: If you run a business and use the services of a pet at work, some of the pet’s expenses can be claimed. Some dogs like German shepherds are used as guard dogs and if you can prove that it protects your inventory, the IRS can accept to write off the  pet’s food expenses.

Pets as a Moving Cost: The expenses incurred when shipping the household pets to your new residence can also be deducted.

These are the three main viable reasons that you could use to claim a refund from the IRS. Please talk to your tax pro for more ways through which you can enjoy some pet-related tax breaks.

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4 Tax Deductions of Which You May Not be Fully Aware

April 11, 2012 By

Tax deductions reduce the amount of income to be taxed and by extension, reduce the amount of taxes payable. There are many tax deductions that one can claim and these deductions can be found on the IRS website. One needs to ensure that they claim all deductions that they qualify for so as to save as much on their taxes as they possibly can. Below is information about 4 tax deductions that you can easily claim in your returns:

Donations to Charity

Most taxpayers are aware that donations to charity are tax deductible. However, many people are not fully aware about the rules appertaining to donations of non-cash items. You can donate food stuff, clothes, bedding, cars, toys, stocks, mutual funds, retirement funds, artifacts and many more items and receive a tax deduction against such donations. However, there are various rules that apply to non-cash donations for qualification as a tax deduction:

  • To claim the deduction, you must itemize your deductions as opposed to going for the standard deduction.
  • Secondly, the value of all donations you are claiming must not exceed 30-50% of your Adjusted Gross Income (AGI). The cap ranges between 30% and 50% depending on the charity that you are donating to.
  • Another requirement for the qualification of non cash donations for tax deduction is that such donations must be made to a qualifying institution. The IRS maintains a database of the qualified charities on their website and you can check whether an organization that you are seeking to donate to is qualified.
  • For non-cash donations exceeding a value of $250, you will need an acknowledgment from the charity organization indicating the value of the items donated.
  • Non-cash donations above $500 will require the taxpayer to file Form 8283 “Non-cash Charity Contribution Form”.
  • Non-Cash donations above $50,000 will require a valuation of the items by a qualified appraiser before claiming the deduction.

Job Search Costs

Expenses relating to a job hunt are generally tax deductible. These expenses include communication costs, costs of sending CVs to prospective companies and travel expenses to a new state or town in search of a job of for a job interview. However, if you relocate to a new town in search of a job, you cannot deduct the cost of relocation as part of the job-hunt expenses. When claiming travel expenses relating to a job hunt, various rules apply for accommodation and meals and one needs to verify the qualification of various costs before claiming.

Medical Expenses

Various medical expenses are tax deductible for taxpayers who itemize their deductions. There are some specific medical related expenses that are tax deductible and that you may not be aware of:

  • You can deduct contributions made to a Health Savings Account (HSA) even if you are not itemizing your tax deductions.
  • Medical costs for a sex change may be tax deductible if the sex change is due to “Gender Identity Disorder” or other recognized disorders.
  • Costs of rehabilitation from addictions are generally tax deductible. This includes alcoholism and drug addiction. However, only the medical aspects of the rehabilitation expense are tax deductible.
  • In 1999, the IRS approved tax deduction of medication costs for treating smoking addictions. Prior to this, medication to control smoking habits was not deductible as it was considered a lifestyle choice.
  • Treatment of diseases and conditions using drugs that are illegal such as Marijuana and Heroin is not tax deductible even if such drugs are prescribed by a qualified medical practitioner.
  • Costs of attending a conference about a chronic disease that you, your spouse or your dependent suffers from is tax deductible.
  • Some medical costs for alternative treatment such as acupuncture are tax deductible

Casualty and Theft Losses

Losses caused by sudden events such as a disaster, break and entry of your home, car accidents, home fires, terrorist attacks, staff embezzlement, losses due to identity and information theft, ransom, credit card theft, black mail, and extortion are tax deductible. For the loss to qualify, the event must happen suddenly and unexpectedly. The event that led to the loss must be illegal according to U.S law. Therefore, losses due to a court order eviction and losses from wear and tear of assets will not qualify under this deduction. Misplacement of items does not also qualify for this deduction. To claim the deduction, you will need to subtract any insurance compensation or financial help you receive in relation to the loss. You also need to subtract $100 from the amount of loss before claiming.

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How to Benefit from Health and Medical Expenses

February 6, 2012 By

During this period every year, apart from fact that everyone is gearing up for the brand new year, there is also the apprehension of the coming tax season. This is usually the period when blogs start discussing about various methods of proper and effective planning as well as tips and hints to better your tax status. Though it is too late for the 2011 tax year, there are however, two simple yet rarely used methods that can help place you in a good tax position for the 2012 tax season; using health expenditures and college tuition to your benefit.

A lot of people do not itemize, so this hint may not be of help annually. A lot more people notwithstanding, who have to pay huge amounts in medical expenses over a period, could however settle all their health care treatment in a short period of time. The reason is that you are allowed to deduct health cost on your 1040 which exceeds 7.5% of their adjusted gross revenue. The hitch here is that for most people, their health expenses isn’t up to that figure. But, if you were to arrange things more effectively, and plan for more health procedures in one year, you can be sure to benefit from this deduction. Non emergency medical undertakings can be grouped together and carried out in a selected year of your choice. Procedures like braces fixing, cosmetic surgeries, laser vision correction, etc.

The second pointer would be expansion of a much familiar deduction: the American Opportunity Credit/Lifetime Learning Education Deduction. What a lot of people don’t know is that, you can make an advanced payment on education in the present year for any authorized program that begins in the first three months of the coming year. In clearer terms, if you pay for your college fees in November, for any semester that begins before February 28, of the coming year, you can claim the expense as part of your deduction on the present year’s 1040. This opportunity may not be available to everyone, as there are restrictions and other snags attached to this practice. It is thereby advisable to consult your tax planner to inquire if you can be allowed to make use of this opportunity.

Keep in mind that getting a tax planner might be more beneficial than using tax calculating software or doing your taxes yourself. There are tiny details in the IRS tax code that can get you in a fix if you are not careful. These products can give advice to tax payers like tax planners can. Beneficial advice can save you from a lot of tax hassles.

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Medical Costs for Sex Change May be a Tax Allowable Expense

January 16, 2012 By

There are various medical expenses that are allowed for tax deductions. These include medical expenses that are not covered by insurance and that are deemed to be medical and necessary. A guide to these medical expenses is provided in a schedule on the IRS website. If a taxpayer incurs any of these medical costs, they can make a tax deduction against such an expense. As for surgeries, any operation that is considered cosmetic is not tax deductible. The determination of whether a surgery is cosmetic or medical is based on whether such a medical operation was necessary for medical reasons or not. One of the surgeries that was previously deemed to automatically fall under the cosmetic category was having a sex change. However, a recent court ruling may have reversed such a perception -even by the IRS – and thereby, making some sex change surgeries tax deductible, depending on the circumstances.

Recent Case on Sex Change

In 2002, a taxpayer filed a return claiming a tax deduction of $5,679 against the cost of a surgical operation to change sex from that of a man to a woman. However, the IRS turned down this deduction and billed the taxpayer with the amount. The taxpayer chose to challenge the decision in a tax court. In the hearing, it was determined that the taxpayer had a psychological condition referred to as Gender Identity Disorder. The disorder was confirmed by three expert witnesses as being a serious medical condition that had impaired the taxpayer significantly. The judge ruled that indeed, the expense was deductible and that the IRS was in error to have levied the amount back to the taxpayer. In his ruling, the judge observed that Gender Identity Disorder was widely accepted as a medical condition and that the Court of Appeal considered the disorder as an authentic medical disorder. In that case, the judge allowed both the therapy and surgery costs to be tax deductible. He however, disallowed the deduction of costs of a breast enlargement operation that had been done on the taxpayer. He found the surgery not fundamental to treating the patient’s medical condition and deemed it cosmetic.

IRS Provides a Guideline for Sex Change Expense

After this ruling by the tax court, the IRS choose not to object it in a higher court but instead, provided rules in their website of the admissibility of certain medical costs relating to gender change. In the Notice of Acquiescence reference AOD201103, the IRS explained that the tax court had found the taxpayers sex change costs as being tax deductible because her condition was proved to be a disease. The IRS provided the ruling on the case and the reasons that the judge gave to allow for the tax deduction. In this case, the IRS will now follow the guideline of the ruling when qualifying costs relating to sex change for tax deductions.

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Tax Breaks for Special Schooling Needs

January 10, 2012 By

Well in excess of six million kids in the U.S. are categorized as requiring special care as they have special needs. In the six years starting from 2005 to 2010, the number of children affected by autism grew by over 70 percent.

There are various tax deductions for education but the one that is of utmost importance for many students with special needs falls under the medical-expense category. Even though children with disabilities have a legal right to access free public education, some families instead choose to use that money to cater for a number of additional therapies.

After Taxes

The IRS Publication 502, titled Medical and Dental Expenses, which is accessible from the IRS website, offers important advice for families under such predicament.

These families can use the medical-expense deductions provided by the government to assist in meeting the costs. Sadly, most parents/guardians and tax professionals ignore it.

According to the same IRS publication, tax rules will allow tax breaks for diagnosis and treatment that is aimed at alleviating or forestalling a physical or psychological illness. The tax breaks can also be used for other therapies such as physical, occupational, and dance therapy.

Supplemental therapies can include the expenses for a program recommended by a licensed healthcare professional. This may easily cater for costs for a specialized college certificate course offered for students with acute learning disabilities.

In case the therapy or education is up for a tax break, travel costs for the student will also be deductible. Both food and accommodation at the specialized school will also be deductible.

The IRS allowed a medical deduction of $5,000 to cater for the costs of customizing the house to suit the specific needs of the student, and additional deductions equivalent to what would have been charged for accommodation, for the simple reason that living out of campus was necessary for medical purposes.

It should be noted that medical expenses are usually deductible only over a minimum rate of about 7.5 percent of gross income. This will rise to 10 percent for those who are yet to pay alternative minimum tax. In 2013, legislation dictates that the contribution to the Financial Services Authority will reduce by 50 percent from the $5,000 it currently stands at. This means that families that have access to a flexible current account can use their money for similar expenses without a threshold.

When a family qualifies for this deduction, most other medical expenses, including birth control pills, contact lenses, and even insurance premiums, will also be deductible. Those who wish to qualify for substantial medical deductions for their special needs children may need tax counsel from experts.

One should however, ensure that the treatment regime recommended by the doctor or other licensed healthcare professional is paid for before it is actually administered. In such a scenario, one should carefully store all the records supporting the deduction. For example, canceled checks to travel mileage.

One should establish the medical requirement for the therapy or special education, noting that it must be clearly focused on treating the problem.

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Tax Deductions for Medical Expenses in Cases of Addictions

September 30, 2011 By

Addictions have a huge impact on our society. They range from substance abuse and sexual addictions to food addictions. People who find themselves addicted to unhealthy substances and unpleasant behaviors will normally have their lives adversely affected by such habits. Addictions, especially drug addictions, have been known to reduce talented actors and actresses, musicians, and celebrities to total dependency and at times, even death. However, treatment and rehabilitation is available for those who find themselves trapped in these addictions. What is even better is that there is quite some tax relief that is available with some of the addiction treatments.

Drug and Alcohol Abuse

Rehabilitation costs for alcohol and drug addictions are part of the qualifying medical expenses for tax deductions. However, the extent of the expenses to be covered is a gray area. The law allows for the deduction of medical care but does not give complete details on what qualifies as “medical care.” The IRS regulations on medical expense deductions provides examples of medical care – surgery costs,  X-rays, hospital services, laboratory work, nursing services, dental work (such as artificial teeth), diagnostic and healing services, medicine and drugs, artificial limbs and ambulance services. However, these are only examples and pretty much, most of other medical costs can qualify under these definitions.

Deducting drug and alcohol rehabilitation medical expenses is only possible for taxpayers who itemize their deductions. To do this, you will need to itemize your deductions on Schedule A of your tax return form. All other itemizing rules apply, including the deduction of the costs (total costs for all qualifying medical expenses) that exceed 7.5% of your Adjusted Gross Income (AGI).

Treatment for Obesity and Food Disorders

For the rehabilitation costs of an addiction to be considered as a qualifying medical expense for deduction, the addiction must be categorized as a disease. Unfortunately, obesity does not qualify as a disease. This means that any treatment primarily targeting at treating obesity will not qualify for the medical deduction. This is especially important to note, as most of weight loss treatments will be rejected for tax deduction qualification. To the IRS, obesity is seen more of a lifestyle choice. However, treatment of specific conditions associated with obesity will qualify for tax deductions. These conditions include high blood pressure, diabetes, and heart disease.

Smoking Addiction Treatment

Smoking addiction was for a long time, considered as a lifestyle choice problem as opposed to a disease by the IRS. For this reason, the IRS did not allow the deduction of costs related to treating smoking addictions. However, in 1999, the IRS reversed this rule and allowed smoking addiction treatment as a qualifying medical expense for deduction. While allowing smoking addiction treatment for tax deduction, the IRS noted that nicotine was a powerful addictive agent and thus, qualifying it as a disease.

Using Marijuana and Heroin for Medical Reasons

The law that provides for the deduction of medical expenses specifically prohibits the deduction of medical costs associated with use of illegal drugs and substances. For this reason, the medical use of Marijuana and Heroin for treating patients is not an allowable expense, even when prescribed by a qualified medical practitioner. This is especially limiting, as modern medical discoveries show that some of these illegal drugs can be used to treat genuine medical conditions. Tax experts foresee the adjustment of this law in the near future to allow deductions of treatments with some of these substances, as long as they are prescribed by a doctor.

Gender Identity Cases

One of the medical expenses that is least expected to pass for an allowable medical expense but yet, allowed for deduction is gender reassignment. The changing of one’s gender is seen as a treatment for a psychological condition – gender identity disorder – and therefore, allowable. This was determined in the case of Rhiannon O’Donnabhain vs. the IRS, where the plaintiff was denied the deduction of costs associated to his/her sex change from a man to a woman. The Tax Court allowed deduction of the surgery costs, but denied the deduction of the breast enlargement costs, as the court ruled this to be for cosmetic reasons rather than medical.

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