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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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IRS Help: What to do when contacted by the IRS Criminal Investigation Division

September 8, 2011 By

The IRS implements a meticulous system that seeks to identify all tax offenders. The IRS categorizes tax offenses in two categories. Negligence is when a taxpayer makes an error either by having erroneous figures or mathematical calculations in their tax returns or erroneously misses various entries while filing. Negligence is seen as not being willful in the discrepancies in figures and the IRS only seeks civil charges against those who are negligent. On the other hand, fraudulence involves outright cheating on your taxes. This is a willful act of defrauding the IRS to avoid paying due taxes. This includes crimes such as having two sets of accounting records for fraud purposes, forging receipts and other documentation, altering figures in various tax records, and not filing a tax return with no valid reason. For such crimes, the IRS pursues both civil and criminal charges.

According to an analysis by the IRS, 17% of taxpayers cheat on their tax returns. The main culprits are employment occupations, businesses that are cash intensive, and service industry workers. This includes bar waitresses, lawyers, doctors, construction workers, domestic workers, and way-side shops. However, the IRS prosecutes very few tax cheats. In a recent tax year, the IRS charged 2,472 taxpayers for criminal offenses, which accounted for only 0.002% of taxpayers. However, these statistics should never be an incentive to cheat on your taxes. The IRS is actively increasing its audits to track down and pursue both negligent and fraudulent taxpayers. 2010 statistics show that the IRS has increased audits in all taxpayer groups. Furthermore, when the ax falls your way, the consequences are really not worth the risks on lying on your returns.

Criminal investigations conducted by the IRS are handled by the IRS Investigations Department. The department has special agents who investigate various potential tax cheats and prosecute taxpayers once they have enough evidence to build a case. If you are ever contacted by one of these special agents, you should be aware that you are being investigated for criminal charges. Here is what to do if you find yourself in such a situation:

  • Ask for Identification – If you are approached by an individual or team of people claiming to be special agents from the IRS Investigations Department, you should ask them for a business card or identification. If the contact is on email or telephone, do not divulge any information whatsoever to them. There are many identity theft scams that are circulating and their aim is to steal your information for malicious use. Besides this, receiving a business card is good for future reference when contacting or referring to the IRS agent assigned to your case.
  • Do Not Answer Questions – After they identify themselves and give you a business card, ensure that you do not give any information about your taxes. The Fifth Amendment in the U.S. Constitution gives you a right to not bear witness against yourself in a criminal case. This means that the agents have no right to get you to talk in any way, concerning your taxes or any other matter that may incriminate you.
  • Beware of the Witness Trap – You should also be careful about the witness trap. The IRS Investigations Department special agents will usually tell you that they are not investigating you but rather, they want you to be a witness in a case. Once they gather enough evidence, they then seek criminal charges against you. Therefore, even if they tell you that they are not investigating you, do not give them any information.
  • Seek Legal Counsel – Next, you should consider seeking legal counsel to get help on how to handle the situation. Your attorney will advise you on what to do and he or she will represent you in criminal claims for your IRS problems.

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Four Temporary Tax Reliefs Available in 2011

September 6, 2011 By

When the Bush tax cuts were passed into law, they were passed as a temporary tax code and were set to expire in 2009. These cuts include many of the tax deductions and tax credits that are claimed every year. However, when the Obama administration took over after the Bush administration, they did not remove these temporary tax cuts. Instead, through a negotiation with the Republican side of Congress, these tax cuts were extended so as to expire in 2012. There are therefore, some temporary tax reliefs that you can only take advantage of until 2012, as they will no longer be available after that – unless Congress decides on another extension. Four of these temporary tax reliefs are explained below:

1. Adoption Credit

The Adoption Credit is a tax credit that is available to people who adopt a child or children. The credit is used to help the adopters to recover some of the costs for adopting children. For the tax year 2011, the tax credit cap for adopting a child is $13,170.00. Households with more than one child can claim a credit for each child. What is better for the 2011 tax year is that the Adoption Credit is refundable. This means that if a balance remains after the credit is used up against due taxes, the IRS will provide a tax refund. The credit is only available to taxpayers who have an income of less than $182,520.00. To be entitled for this credit, you will need to file IRS Form 8839, attaching the support documentation of bills related to the adoption process. For children with special needs, the adopter can claim the maximum credit without producing any support documentation.

2. American Opportunity Credit

Under the American Opportunity Credit, taxpayers who have incurred higher education expenses (tuition only) can now claim a tax credit against the expenses with a cap of $2,500.00 annually. The credit is available for taxpayers who have an income of $90,000.00 and below (and for those who file jointly, there is an income cap of $180,000.00).

3. Charity IRA Rollover

The Charity IRA rollover is a tax opportunity available to taxpayers who are 70.5 years and above. The taxpayers can contribute their IRA funds to a qualifying tax-exempt charity up to a cap of $100,000.00 with no tax implications. This tax break is only available until end of 2011 and therefore, those seeking to take advantage can only do so within this time.

4. Health Insurance Deduction

For those in self-employment, the tax code provides a tax savings for the health insurance of you and your whole family. A taxpayer can now deduct the premiums paid for the health insurance policies of him or herself and his or her spouse and children. For the children, the tax relief allows for the deduction of premiums for children aged 27 years and below, even if they are not dependents.

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IRS Payment Options if you are Unable to Pay Taxes Due

September 2, 2011 By

If you find yourself in a situation where you are unable to meet your due taxes before the tax deadline, do not despair. There are available options that you can take advantage of to ensure that you do not agitate Uncle Sam. Here is what to do if you find yourself in such a situation:

File a Tax Return

Ensure that you file a tax return, even if you are unable to pay off the due taxes immediately. There are worse consequences if you do not file the return. Not filing amounts to more tax troubles and may even surmount to criminal implications.

Consider Various Options for Paying your Due Taxes

Once you have filed your tax returns, you need to plan on how you will pay the taxes due. Depending on the amount of taxes that are owed, you may consider the following options for delayed payments:

  • Request for Short Delay – If you will have the funds to pay the taxes within 120 days, then you may call the toll-free IRS number and request for a short delay. The IRS customer service representatives handling such issues are permitted to make an interest and penalty free extension of up to 120 days if you provide a good reason for the delay.
  • Installment Agreement – If the amount you owe is below $25,000.00 and you are not able to pay it all in one lump-sum, you can apply for an installment agreement under the Online Payment Agreement service available on the IRS website. You can also call the toll-free IRS number to set up this installment agreement. The installment agreement is automatic for any taxpayer who owes below $25,000.00 and you can determine the installments to pay as long as you will repay within the required period. This installment agreement also has an extra advantage – you will not be requested to provide financial statements or any further paperwork. However, you will need to pay interest on the taxes due and late payment penalties. The interest rate for tax debt to the IRS is currently at 4% and is subject to change every three months. The late fee is currently 0.25% for Installment Agreements and 0.5% for tax debts outside IRS payment agreements.
  • Consider Borrowing – You can also consider taking a loan to clear your due taxes. However, you will need to compare the amount to pay if you took up a loan against making late payments through installments. Depending on your loan terms, you can check if the loan interest will amount to more than what the IRS will charge in interest and lateness fees. If the loan interest rate is less than that of the IRS’s deal, then it would be advisable to take the loan and pay off your taxes. However, if it is cheaper to take the IRS Installment Agreement, you should not be hesitant as there is no recourse to taking the agreement.
  • Prioritize Between State and Federal Taxes – If you owe both Federal taxes and State taxes, you should also do a comparison of the charges to be levied if you are late on either of the taxes. You can then pay off the taxes that bear more charges in interest and late fees and place an installment agreement with the tax authority with lower charges.
  • Seek Professional Help – If you owe over $25,000.00 or are still unsure about how to handle your tax dilemma, you may consider seeking help from a tax professional on what to do regarding which option to select.

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Top 10 IRS Tax Deductions and Tax Credits in 2011

September 1, 2011 By

The 2012 April tax season that accounts for the 2011 tax year may seem far and most taxpayers may not be overly concerned with their taxes at the moment. However, being conscious of tax matters as the year goes by ensures that you not only have a smooth tax time as you draw close to the next tax season, but also capitalize on the available tax opportunities. The major way in which taxpayers get tax savings from their returns is through tax credits and tax deductions. Below are 10 of the most common tax deductions and credits that you may qualify for in the 2011 tax year.

1. Charity Donations

Donations are the easiest and one of the most common tax deductions. The tax code allows for a tax deduction of donations made to any qualifying tax-exempt organization. In 2011, the IRS released a list of the organizations that had lost their tax exempt status due to non compliance with various regulations. A taxpayer therefore, needs to verify that an organization is qualified as tax exempt to be able to qualify for the tax deduction. For donations above $250.00, you will need an acknowledgment from the organization that you have donated to as support documentation for the tax deduction. For non-cash contributions above $500.00, you will need to file Form 8283, “Non-cash Charitable Contributions Form”. Non-cash items that are above a given threshold will also require a valuation from a qualified appraiser.

2. Child Care Tax Credit

The Child Care Credit is given to parents or guardians who spend money to have their children or qualifying dependents taken care of while they are out working. The credit can be claimed for regular child care or even for a summer day-camp. The amount to claim depends on one’s income and the number of children. The allowed credit ranges from 20% to 35% of one’s income. The credit also has an annual cap of $3,000.00 for a single child and $6,000.00 for more than one child.

3. Mortgage Interest

The mortgage interest tax deduction allows homeowners who are paying for a mortgage to claim a deduction on the mortgage interest paid on their primary residence and qualifying second home. Various rules govern the qualification of primary residence and second home and you will need to ensure that your homes qualify before deducting these expenses. Besides mortgage interest, you can also deduct the real estate taxes paid on non-business property.

4. Medical Expenses

Various medical expenses can be tax deductible for taxpayers who choose to itemize their tax deductions. The qualifying deductions are subject to a threshold of the excess of 7.5% of one’s Adjusted Gross Income. The expenses include travel related to medical care, out-of-pocket medical expenses, and health insurance premiums. For out-of-pocket expenses, there are various items that qualify and you can get a comprehensive list of qualifying medical expenses from the IRS website.

5. Health Savings Account

Contributions to a Health Savings Account (HSA) are also tax deductible. However, the HSA must be a qualify one for the tax deduction. Interests earned from the account are also not taxable. However, for a HSA to qualify, it must be a high-deductible health plan.

6. Work Related Expenses

There are various work related expenses that are IRS tax deductible. Various training expenses, business travel (excluding travel from home to the office), qualifying work uniforms and work clothing, and qualifying entertainment expenses for potential clients are tax deductible, subject to various IRS rules. These expenses only qualify for deductions if they were not reimbursed by the employer.

7. Home Offices

For people who work from their homes, they can deduct various home expenses that are related to their home office. You will need to determine and apportion the home expenses that are attributed to the home office to deduct the costs. The expenses include rent, insurance, mortgage, repairs and maintenance, other related utilities, and depreciation.

8. Qualifying Retirement Savings

Contributions to various qualifying retirement accounts such as 401(k) accounts and IRAs are also tax deductible. For the 2011 tax year, the cap on the contributions to these retirement accounts is $16,500.00. For senior citizens above the age of 50, the tax exempt limit goes up to $37,500.00.

9. Education Expenses

The tax code also allows for tax deduction of various education-related expenses. For the 2011 tax year, there is a cap of $4,000.00 for tax deductions of tuition-related expenses. You can also claim the American Opportunity Tax Credit if you qualify for it.

10. Student Loans

Interest paid on student loans is also tax deductible subject to an annual cap of $2,500.00. This applies only to the interest and not the principal. However, to qualify for this tax deduction, you must be earning an income of less than $70,000.00 for single taxpayers or $145,000.00 for married taxpayers who file their taxes jointly.

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IRS Problems: Interim Letters Cause More Confusion as Opposed to Resolving Inquiries

August 31, 2011 By

The IRS internal rules require every inquiry letter sent to them by a taxpayer to be responded to within 30 days of its receipt. The rules also provide that should the department handling an inquiry be unable to provide a response within the set timelines, they should send an interim letter to the inquirer within the 30 day period to inform him or her that the inquiry is still being handled and to give the inquirer an update of the progress on the case. The intentions of this internal rule are noble. However, as was noted in an audit carried out by the Treasury Inspector General for Tax Administration (TIGTA), a group that reviews IRS problems, many of the interim letters are confusing to taxpayers and may not fulfill the intentions of this IRS internal rule.

The IRS has Many Formats of Interim Letters

The TIGTA undertook an audit in July 2011 to investigate the effectiveness of the IRS in handling inquiries received. According to the audit report, the IRS has over 70 different interim letter formats for different tax issues. The formats are for initial interim letters, second interim letters, follow up letters, acknowledgments, transfer of inquiry, apologies, closing letters, and many more interim correspondences. Depending on the matter being inquired and the delay by the IRS in handling the inquiry, a taxpayer can receive many of these interim letters in different combinations. Furthermore, since the interim letters are not resolution letters, they do not have information about the taxpayer’s tax account or direct answers to the inquiry. To the ordinary taxpayer, the content of the interim letters is confusing and unclear. Many taxpayers will not know whether they need to take action in response to the letter or what to do with the interim letters in general. In this case, many taxpayers either call the toll-free number to get clarification about the letter or send out another letter to seek clarification. This only results in the increase of inquiries sent to the IRS.

Interim Letters Not Sent as Per IRS Internal Rules

Another problem highlighted by the TIGTA audit was that the interim letters were automatically generated in a systematic cycle, which led to unnecessary interim letters sent out. From the samples that were used in the audit, 12% of the interim letters sent out from the Automated Underreporter Program department (one of the major departments that deal with client responses) arrived to the taxpayer after the issue had already been resolved and 29% were received 10 days prior to the issue being resolved. 29% of the first interim letters were sent out after 30 days of initial inquiry to the taxpayer, conflicting with the IRS internal rules. In the Accounts Management Function, another department that majorly deals with taxpayer correspondences, 19% of interim letters were sent within 10 days of the issue being resolved and 12% of the first interim letters were sent after the 30 day deadline. Furthermore, 20% of the inquiry letters received by the Accounts Management Function department were resolved after the 30 day time line did not have any interim letters sent as required.

Survey by the IRS Confirms the Interim Letter Issue

According to the TIGTA report, a survey carried out in 2010 by the IRS on the effectiveness of interim letters also revealed that most taxpayers did not understand interim letters and indeed, found them confusing. The IRS also noted that the interim letters were not being used to meet the objectives of the IRS of providing timely and accurate responses to taxpayer inquiries. Instead, the interim letters had become a way of buying time for the departments handling the inquiries. However, the IRS has yet to take action on the findings of this survey.

Recommendations by the TIGTA

Following the audit, TIGTA recommended that the IRS review its interim-letter procedures to ensure that the interim letters are sent in a timely manner and as per the internal rules. The interim letters should also be clear so the average taxpayer can easily understand its contents and should provide the taxpayer with specific information as to the progress of the inquiry and the expected time of resolution. The IRS agreed with the audit and also undertook to look into implementing these recommendations.

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Will Free IRS Tax Preparation Software Save the Taxpayer?

August 25, 2011 By

Every now and then, various lawmakers propose a move to have the IRS provide free tax preparation software to the public to save the taxpayers from the money spent on hiring professional tax preparers. The most recent proposal was advocated by Sen. Mark Kirk and Sen. Dick Durbin in mid 2011. The lawmakers argued that taxpayers spend a lot of money hiring tax preparers and this can all be avoided if the IRS were to provide free tax preparation software to them. However, even though such a move would help many taxpayers prepare their tax returns, there are still some arguments against this line of thought. Some of the arguments posed by the opponents of the proposal are:

  • Complex Tax Code – The tax code has been changed so many times since the tax law was enacted in 1913. In fact, the tax code has been significantly altered 28 times since 1913. Besides the significant alterations, every year, Congress passes various modifications and alterations to specific aspects of the tax code. This has made the tax laws very complicated for the average taxpayer. In fact, some of the tax provisions remain unclear even to tax professionals and the IRS staff. In fact, because this is such a significant issue, the Treasury Inspector General for Tax Administration (TIGTA) releases a report every year that reveals large sums of taxpayers’ money lost annually because of a misunderstanding of the tax code. Therefore, the main reason that taxpayers will go to tax preparers to file their returns is because of the complexity of the taxes (as opposed to the convenience of preparing the taxes via proxy).
  • IRS Budget Cuts – Another argument against provisions of the free software by the IRS to taxpayers is the budget cut on the IRS’s resources. The House Appropriations Committee’s subcommittee on financial services reduced the IRS budget for the 2012 fiscal year. The committee approved a budget lower than that of 2011 on the pretext that the Federal government needed to cut on spending, owing to the large Federal deficit. The IRS may even be forced to cut jobs and to place a hold on its various expansion plans. Therefore, introduction of free tax preparation software for taxpayers may be least of their priorities at the moment. The free software will cost funds that the IRS simply cannot afford to exhaust; they will have to spend more funds to train taxpayers on how to use the free software if such a move were to be commissioned.
  • Too Much Information to the IRS – According to various surveys conducted in the past, many taxpayers avoid any direct interactions with the IRS because of their unwillingness to divulge a lot of personal information to them. Tax-preparation software will require the taxpayer to provide a lot of their financial information to assist them in preparing their tax returns. Therefore, many taxpayers would avoid using the free tax software from the IRS in the fear that the IRS would get too much of their personal information.
  • There is Free Tax Preparation Software Already – Another argument against the launch of free tax preparation software by the IRS is the fact that there is already free preparation software available. The Free File Alliance and Vita Software have been providing free filing services for a while. If software were truly the issue, then many taxpayers would not pay for professional preparers and instead, go for these free software (which is not the case). This underscores the fact that tax complexity, and not software convenience, is the main limitation for taxpayers and highlights their preference to seek professional tax assistance.

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IRS Removes Controversial Two Year Limitation on Innocent Spouse Relief

August 23, 2011 By

The IRS has made a historic removal of a two year limitation rule the Innocent Spouse Relief starting July 2011. This removal of the 2-year rule applies for most qualifying taxpayers seeking to get protection under the relief. Prior to this tax code change, those seeking to be relieved from tax obligations through the Innocent Spouse Relief had to do so within two years from when the IRS contacted the spouses for collection. In practice, many spouses who were innocent to the tax liability because they were either unaware of the due taxes or were in abusive marriages (and could not refuse signing because of duress or pressured influence) could not qualify for relief because of the time limitation. One reason for this is that if the IRS contacted the “guilty” spouse for collection, he or she may conceal this from the other “innocent” spouse and thus, the innocent spouse would remain unaware of the collection process. When the “innocent spouse” finally becomes notified of the back taxes being collected, often times, it would be past the two year time limit and therefore, too late to claim the relief. However, with the removal of the 2-year time limit, many innocent spouse will now get their relief with no time constraints.

Time Limit Still Applies for Some

The IRS however, maintained that the two year rule will still apply for spouses who became aware of the IRS collection within the two year time frame and did not take any action. This rule however, will not apply for any spouse who is or was in an abusive marriage.

About Innocent Spouse Relief

The Innocent Spouse Relief is a tax relief provided to spouses who file taxes jointly with their partner. The current rules for the relief were introduced into the tax code in 2002. According to the tax code, when a couple files taxes jointly, they are both held responsible for the information in the tax return and should an issue arise from the tax return, they are both held liable individually (and the IRS can collect the back taxes from either or both of the spouses). However, under the Innocent Spouse Relief, if a spouse is unaware of false information claimed on the tax return (and the IRS discovers the false information in the returns), the spouse can be absolved from the consequential tax liability that may arise. The innocent spouse will need to file IRS Form 8857- “Request for Innocent Spouse Relief Form” and provide an explanation of their innocence in the tax liability. If there is enough evidence to show that the spouse could have been unaware of the due taxes or forced to sign the tax returns against his or her will, the IRS will relieve the spouse of the taxes due.

The Scope of the Relief

The IRS receives on average about 50,000 Innocent Spouse Relief applications every year. They however, reject close to 2,000 applications for the lapsing of the two year limitation. However, with this new inclusion to the tax code, many of these victims will now receive justice and get the relief. The IRS has stated that this new rule will take effect immediately and any cases that are still under review will now be considered under this new rule. Any spouse who had been denied the relief because of the time limitation prior to the announcement can now reapply for the relief.

Action towards Removal of the Time Limitation

The removal of the time limitation on the Innocent Spouse Relief came after a spirited campaign by politicians and activist groups. The opponents of the former two year rule argued that the limitation cut off many innocent spouses from getting justice. Earlier in 2011, a group of House Democrats wrote a letter to the IRS commissioner, seeking the IRS remove the two year time limit. This followed many debates and discussions on Capitol Hill and the media that sort to have the IRS remove this rule. After all of these tremendous efforts, the changes have come as a welcome relief to many.

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Claiming Qualified Long Term Care Expenses as Medical Tax Relief and Deduction

August 19, 2011 By

Under the Federal tax code, long-term care services provided for medical reasons are an allowable expense to deduct. However, according to Sec. 7702B(c)(1) of the Federal law, a licensed physician must prescribe such care as being fundamental for the well-being of the patient. Long-term care deductions allows for people who have chronic diseases and conditions of incapacitation to receive long-term care, including an attending nurse or caretaker, without paying taxes for such services. There are various rules and qualification guidelines that govern the application of this IRS tax deduction.

Qualification Requirements

The long-term medical care can only be claimed by taxpayers who itemize their tax deductions as opposed to using standard deductions. You therefore, need to use the right Form 1040 to benefit from these long-term care expenses and have them deducted. The expenses also need to have support documentation. The person claiming the deduction must maintain the doctor’s statement that prescribed the long-term care, including the diagnosis of the medical condition. Besides the doctor’s statement, one also needs to keep the receipts or payment vouchers for such medical care. All other tax requirements, including withholding of taxes for any employees involved in the long-term care, need to be adhered to.

Itemized Deduction

Itemizing of tax deductions is more complex than taking the standard deductions route. A taxpayer itemizing deductions needs to schedule all the tax-deductible medical expenses that need to be itemized and determine if the expenses exceed 7.5% of his or her Adjusted Gross Income (AGI). Therefore, for itemized expenses to qualify for deduction, a taxpayer must have above this 7.5% threshold in total medical expenses. There is however, no cap or maximum for these itemized deductions.

Case in Point – IRS vs. Estate of Baral

In some instances, the IRS has differed views with taxpayers on what qualifies as long-term care as prescribed by a physician. This was the case for Lillian Baral, who had been diagnosed with dementia. The doctor recommended long-term care and Baral’s brother, who was her financial trustee, employed two caretakers to attend to her. The condition of her illness deteriorated her mental and physical capacity and she finally succumbed to her infirmity in 2008. Due to her condition, she did not manage to file a return in 2008 for the 2007 tax year. Since no tax return was filed, the IRS decided to use their estimate and determined that she had earned incomes of $94,229.00 and had underpaid taxes by $17,681.00. However, in their calculations, the IRS did not allow for the inclusion of her long-term care expense – Baral’s brother had paid $49,580.00 to the caretakers and had also reimbursed expenses of $5,566.00.

The issue was referred to a tax court to determine if the IRS was just in their actions. In the ruling, the court held that the wage payments to the caretakers qualified as long-term care for tax purposes and that the IRS was out of order to have these expenses excluded for tax deductions. The court however, held that the reimbursed expenses could not pass for the deductible of long-term care expenses as there were no receipts (support documentation) to support these expenses.

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Casualty, Disaster, and Theft Tax Deductions – IRS Help Available

August 12, 2011 By

The casualty, disaster, and theft tax deduction is becoming a popular tax relief for many taxpayers, especially with the bad weather that has hit various parts of the United States and as theft becomes more sophisticated with technological advancements. This relief for losses allows taxpayers who have undergone sudden losses through theft or accidents to get tax deductions for the losses.

History of the Disaster-Related Tax Deductions

Tax relief for business and individual losses goes far back beyond the current tax code. As far back as 1867, the then-tax laws allowed for victims of ship wrecks to claim deductions against such losses. Since then, the occurrence of various disaster and loss events has triggered the inclusion of other items to this loss relief law. In 1870, after the Harpers Ferry Flood, the tax code introduced floods as a deductible loss. In 1916, theft and other casualty losses were introduced into the law. Since then, the law has been adjusted to include losses for bank insolvency, different kinds of thefts (including ransom and information theft), and other bad weather disasters.

The Current Tax Code on Casualty and Disaster

The current law on the casualty, disaster, and theft tax deduction provides various qualifications for anyone seeking to make a claim. Some of these qualifying rules are provided below.

  • Unprecedented Loss – For a loss to qualify for the deduction, it has to be sudden and unprecedented. Losses such as wear and tear or losses that occur gradually cannot qualify. The claim is available to both individuals and businesses. Some of the losses that will qualify include theft of personal property, ransom, accidents, losses from bad weather such as hurricanes, losses from volcanic activity, terrorist attacks, blackmail, identity theft, cyber hacking, loss of bank deposits through insolvent banks, and employee embezzlement.
  • Net of Insurance – If the qualifying loss was insured at the time of event, the taxpayer cannot claim a deduction. However, if the insurance for whatever reason declines to make a reimbursement, you can go ahead and claim a deduction. If you get partial compensation, you can make a deduction on the uncompensated amount.
  • Timing of Claim – A taxpayer making a claim for the loss deduction can only do so in the same year that the loss occurs. However, for Federally declared disaster areas, the taxpayers can make the claim up to the year preceding the disaster event.
  • Itemized Deduction– Taxpayer seeking to make a deduction for the casualty, disaster, and theft claim can only do so if he or she itemizes deductions. In this case, one has to use Schedule A of the Form 1040. The taxpayer can only claim what is in excess of a $100 threshold and being an itemized deduction, one has to claim the itemized deduction amount that is above 10% of their Adjusted Gross Income.

The tax code has, over the years, introduced specific and temporary laws to provide extra relief for victims of specific catastrophes. Going forward, the casualty, disaster, and theft tax relief is set to keep changing even as theft, crime, and disaster takes new and various shapes as the years go by.

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